Oversold: Oil traders punish OPEC for promising too much

Oil markets and investors are a troubled lot with situation like a pendulum or a double edged sword wherein the benefits of lower production by the OPEC members are getting compensated with higher production from the US.

Meanwhile, the benchmark DAX in Germany was down 53.05 points or 0.42 percent to 12,568.67.

"There was hope that there would be half a million extra barrels coming off", said Robert Yawger, director of energy futures at Mizuho Americas.

Global benchmark Brent fell by 0.5% to $51.18 a barrel, while the USA crude prices decreased by 0.6% to reach $48.57 a barrel, reported Reuters.

"It's odd. I don't know why (the market crashed)" Zanganeh said.

The production cut has been extended by nine months and can persist up to a year.

"Expectations had become so high that the mere extension of the status quo by nine months resulted in disappointment", said analysts at Commerzbank. "It's the first time that I witness 100 percent compliance (with cuts) from OPEC and close to 100 percent from non-OPEC", Iranian Oil Minister Bijan Zanganeh told Reuters afterward.

The cartel next meets in November.

Competition from the USA shale has toughened and is threatening OPEC's monopoly.

Goldman Sachs warned that the biggest risk to oil markets was what would happen next year, at the end of the OPEC-led production cut. "It becomes so efficient that it can make money at sub $50 oil", said Curt Taylor, president of consulting firm Opportune LLP's Ralph E. Davis Associates in Houston.

Year to date, USO has added more than $125 million in new assets, but there are some signs traders are growing exhausted of the fund from the long side as USO lost almost $15 million in assets since the start of the current quarter.

Going forward, Nizam Hamid, European ETF strategist at WisdomTree said: "With supply side dynamics undergoing a fundamental shift [thanks to the impact of United States shale], only decisive action from Opec will boost prices from current levels, and so far investors have not been satisfied that Opec is tackling the issue aggressively enough".

The cuts, agreed at a meeting of OPEC and other major producers led by Russian Federation in Vienna on Thursday, were aimed at tightening the market and support the plummeting prices. Rising U.S. production could completely replace OPEC's output cuts of 1.2 million bpd by year-end, according to RBN Energy.

  • Zachary Reyes