Oil prices flat in quiet trading, US drilling activity concerns investors

Oil prices
Oil prices were flat in quiet trading on Monday as the United States observed Memorial Day, UK residents enjoyed Spring Bank Holiday and the Chinese celebrated the Dragon Boat Festival. QEP Resources photo.

Oil prices up Monday

Oil prices were relatively flat on Monday as trading in the United States, Britain and China was subdued as the three nations each celebrated public holidays.

Despite the calm, markets remain restless on uncertainty about whether the impact of the OPEC supply cut on the global crude glut would be enough to support prices.

 

Brent crude futures ended the session up 14 cents to $52.29/barrel and US WTI crude futures were up 19 cents to $49.99/barrel.

“This is a little bit of a bounce back from last Thursday when we had a really heavy drop,” James L. Williams, an energy economist at WTRG Economics told Reuters.

“But nine months of current production levels is not going to be enough to meet OPEC’s goal” of balancing crude supply, which has limited price gains.

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Last Thursday, OPEC along with some non-member oil producing countries, including Russia, announced they would extend the supply reduction agreement into next year.

The participants in the pact agreed to continue to cut 1.8 million barrels per day (b/d) until March 2018.  The original agreement that began in January was to expire next month.

Carsten Fritsch, Commerzbank analyst, told Reuters that Monday’s price move was little more than “intraday noise”. Fritsch added that unfulfilled hints that OPEC would make the cuts deeper or the extension longer left the market deflated after Thursday’s announcement.

“They increased expectations to such an extent that nine months was a disappointment,” Fritsch said.

Fritsch also says the market is not convinced pact participants will maintain high compliance with the agreement.  “The pain for OPEC will increase to such a point that 100 percent compliance is unrealistic,” Fritsch said.

Uncertainty over the OPEC agreement along with a 10 per cent increase in US shale production has left the market unsettled and oil prices have remained stuck around $50/barrel.

Last week, Baker Hughes reported US drillers added rigs for the 19th straight week, bringing the total to 722, the highest since April 2015 and the longest run of additions on record.

Almost all of the increase in US production has been in shale plays.

Reuters reports that even with a flat rig count, Goldman Sachs estimates US output from the Permian, Eagle Ford, Bakken and Niobrara shale fields will increase by 785,000 b/d between the fourth quarter of 2016 and Q4 of 2017.

Increasing US production may eclipse the OPEC supply cuts, and leave bloated crude supplies unchanged.

“It’s going to be all about inventories and whether they fall as much as OPEC thinks,” Greg McKenna, chief market strategist at futures brokerage AxiTrader told Reuters.