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Oil prices hit November lows despite OPEC output cut extension talk

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Oil prices fell in trading on Tuesday as investors await reports which are expected to show an increase in US crude stocks. Anadarko photo.

Oil prices down, US crude inventory expected to rise

Oil prices fell in trading on Tuesday to their lowest point since November week as the market discounted the possible effects of an extension to the OPEC supply cut agreement.

The drop comes ahead of the release of weekly US crude inventory reports on Tuesday and Wednesday which are expected to show in increase in stocks by 2.6 million barrels, according to a Reuters poll.

If the increase comes to pass, it would be the tenth weekly build of crude stocks in the past 11, following a dip in inventories last week that surprised analysts.

Brent futures for May delivery fell by 66 cents, or 1.3 per cent to $50.96/barrel, the lowest since March 14.

US WTI crude was down 88 cents, or 1.8 per cent to $47.34/barrel on the last day the April contract is the front-month, its lowest level since Nov. 29.

According to sources within OPEC, cartel members are increasingly in favor of extending production cuts, but are looking for the backing of non-members such as Russia.  However, as of yet, Russia has not cut production by the amount pledged by Moscow.

“OPEC is sticking with a plan that has not worked,” Phil Davis, managing partner at PSW Investments told Reuters.  Davis added the group is not offering more cuts and no new countries are becoming part of an extended supply cut pact.

Despite a number of OPEC members and some non-members dropping production, the global crude supply glut remains.  The pact has also spurred growth in the US shale industry, Goldman Sachs said in a research note.

“U.S. oil producers are not going to be held back. For every barrel Saudi Arabia takes off, it looks like U.S. E&Ps (exploration and production companies) are going to put on two,” Kyle Cooper, a consultant for ION Energy in Houston told Reuters.

In a note, Commerzbank said “We think it is very unlikely that Russia will actively take part in any extension of the production cuts that goes beyond paying lip service to the agreement.” The message added that it would be premature for investors to “pin their hopes” on an extension.

According to Commerzbank, OPEC cuts would have go last into Q4 to achieve the cartel’s goal of cutting oil supplies in industrialized countries to their five-year average.

Finally, investors are waiting for US crude stocks reports which are expected to show rising stocks following a surprise drop in the week to March 10.  Data from the American Petroleum Institute is released Tuesday afternoon while US Energy Information Administration data will be released Wednesday morning.

“Another increase would be generally bearish for WTI-related spreads,” Tamas Varga, analyst at London broker PVM Oil Associates told Reuters.

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Posted in: Energy Financial

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