Oil Tumbles as OPEC Cuts Disappoint
May 25 2017 - 4:34PM
Dow Jones News
By Stephanie Yang and Alison Sider
Oil prices declined sharply on Thursday after an agreement among
major oil producing nations to extend output cuts failed to appease
investors, who had hoped for more action from the cartel to support
prices.
The Organization of the Petroleum Exporting Countries renewed a
deal with other non-OPEC producers to cap production into March
2018 on Thursday, continuing an attempt to mitigate a global supply
glut and support oil prices.
But in the biggest one-day loss since May 4, oil prices fell to
a one-week low following the Thursday meeting. Light, sweet crude
for July delivery lost $2.46, or 4.8%, to $48.90 a barrel on the
New York Mercantile Exchange. Brent, the global benchmark, fell
$2.50, or 4.6%, to $51.46 a barrel.
Many investors were taken aback by the big swing, since OPEC did
exactly what its leaders suggested it would do in the weeks leading
up to the meeting. Oil prices began to climb last week after Russia
and Saudi Arabia announced that they would push for a nine month
extension to the deal, hitting a one-month high Tuesday.
Previously, OPEC had only said it would consider extending its
agreement by six months.
But by signaling its willingness to commit to a longer cut, OPEC
may have unintentionally raised expectations even higher, some
investors said. In the days leading up to the meeting, some
analysts suggested that OPEC could agree to reduce output further,
fold in smaller producers that sat out the first round of cuts,
like Egypt, or extend the cuts for a full year.
"The anticipation of deeper cuts started to disseminate into
investor thought, that it was only deeper cuts that would take us
higher," said Chris Kettenmann, chief energy strategist at Macro
Risk Advisors.
Comments by OPEC ministers may have also bolstered expectations
that major producers would strike a more dramatic deal Thursday.
Iraq Oil Minister Jabbar al-Lueibi said there were "three or four
options" to discuss at Thursday's meeting. Some, including Russian
Energy Minister Alexander Novak, suggested 12 months of cuts were
being considered. Earlier this month, Saudi Arabia's oil minister
said producers would do "whatever it takes" to rebalance the
market.
"That type of verbiage is pretty extreme, and I think it
inflated investor expectations into the event," Mr. Kettenmann
said.
To be sure, few publicly predicted any of those things were
likely to come to pass. But some investors may have gotten their
hopes up anyway.
"Those kinds of reports or whether or not they were founded, get
people excited. 'Oh, could there really be deeper cuts?'" said Nick
Koutsoftas, a portfolio manager with Cohen & Steers. "I don't
think the market observers are really appreciating the magnitude of
these cuts and what it's going to do to the balance. To me is it's
a little mind boggling."
The recent disappointment builds on increasing sentiment among
investors that OPEC's ability to influence oil prices has greatly
diminished, as other countries such as the U.S. and Canada have
increased domestic production in response to higher prices.
"There's been very little success in the global picture," said
Donald Morton, senior vice president at Herbert J. Sims & Co.,
who runs an energy-trading desk. "This market was holding by a
thread."
The drop in oil prices dragged on the rest of the energy market
as losses accelerated throughout the day. Gasoline futures reversed
gains and closed down 2.6% to $1.6093 a gallon and diesel futures
closed down 3.5% at $1.5509 a gallon.
Write to Stephanie Yang at stephanie.yang@wsj.com and Alison
Sider at alison.sider@wsj.com
(END) Dow Jones Newswires
May 25, 2017 16:19 ET (20:19 GMT)
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