Oil prices fall on rising US output, profit taking

Oil prices down over 1 per cent Monday

Oil prices fell over 1 per cent on Monday on profit-taking and concerns over rising US crude production, but remained close to recent two-year highs after OPEC extended its supply cut agreement last week.

By 1:49 p.m. EST, US WTI had fallen by 80 cents to $57.56 and benchmark Brent was down $1.03 to $62.70/barrel.  The Canadian Crude Index hit $40.06.

Brent hit a two-year high of $64.65 last month and, according to Reuters, has since attracted record investment by fund managers.  As well, hedge funds and money managers upped bullish wagers on US crude to the highest on record.

“Managed money is very long – both futures and options,” Tony Headrick, energy market analyst at CHS Hedging told Reuters. “If the bulls are not fed, we’re subject to a bit of profit-taking that I think we’re seeing today.”

John Kilduff, partner at Again Capital Management told Reuters that the market could make a slight correction, and pull further downward.

“We’re in a situation where there might not be much more ammunition on the bullish side,” he said.

US crude production continues to rise and is closing in on record highs, according to data from the US Energy Information Administration.

In September, US output was up to 9.5 million barrels per day (b/d), the highest since 2015.  On an annual basis in 1970, US output peaked at 9.6 million b/d.

As well, Baker Hughes reported that the US oil rig count rose by two in the week ending Dec.1.  The rig count now sits at 749, the highest since September and has risen sharply since this time last year when there were 477 active rigs.

“Even higher prices are likely to be precluded by news from the US, where drilling activity is being stepped up,” Commerzbank analyst Carsten Fritsch told Reuters.

Late last week, OPEC and some non-cartel members, including Russia, agreed to extend the supply cut agreement until the end of next year.

“Market reaction has been positive so far. There are only two worrying aspects … One is that Iraq’s indiscipline has not been discussed, at least not publicly,” PVM Oil Associates strategist Tamas Varga told Reuters. Varga was referring to Baghdad’s compliance with output cuts.

The reworked deal allows for participants to exit the pact if the market overheats.  Russian officials were concerned that the pact extension could result in higher US production.