Oil falls sharply on supply worries; OPEC gains gone
- Author: Zachary Reyes May 06, 2017,
May 06, 2017, 18:13
Oil prices stabilized in Asian trading Friday after hitting a five-month low while regional stock benchmarks headed lower in holiday-thinned trading. USA crude fell as low as $45.39, Brent touched $48.32.
European benchmark North Sea Brent crude fell 1.8 per cent to $47.49 a barrel in early morning trade on the Singapore trading platform on Friday, while USA crude dropped 2.1 per cent to $44.58 a barrel.
Oil prices have come under pressure amid market jitters about how long it will take to cut back a global glut in supply.
Still, gasoline demand for the past four weeks was down 2.7 percent from a year earlier, so stocks of the fuel, at 241.2 million barrels, remained 10 percent higher than the seasonal average over the past decade.
About $7 million worth of options changed hands Friday that will pay off if West Texas Intermediate crude falls beneath $39 a barrel by mid-July, according to data compiled by Bloomberg.
It came after a Kremlin spokesperson said no decision had been made on whether Russian Federation would agree to extend oil cuts - which were introduced by Opec and other major oil producing states in January - into the second half of the year.
Nigeria, which now pumps about two million barrels of oil per day, is seeking to be exempt from the new OPEC deal, which would be considered at the next ordinary meeting in Vienna.
While OPEC is cutting back to alleviate price pressures, US fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel - according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
Those elevated inventory levels have weighed on sentiment in recent weeks, contributing to a sell-off in the oil market that shaved about $8 off the price of benchmark US crude in the last three weeks.
Supply is still outpacing demand, with USA oil production alone up by 10% since summer 2016.
Ole Hansen, head of commodity strategy at Saxo Bank, said OPEC's meeting on May 25, where the group plans to make a decision on a possible extension of the output cuts, is "eventually going to attract some opportunistic buying".
The turbulence comes after prices yesterday dropped to the lowest level since November 2016, when the Organisation of the Petroleum Exporting Countries (Opec) agreed to cut production in order to rebalance the oversupplied market.
"OPEC's failure to raise oil prices is fundamentally linked to their failure to bring down petroleum inventories", said analysts at Bernstein. Prices fell to as low as $46.64, the lowest since November 30.
"Furthermore, recent days have actually seen slightly bigger declines in the contracts three to eight months out, meaning that the potential for 2018 weakness and worries that Opec can and will not continue to cut ever deeper into its production levels are gaining relevance out there".