Oil prices fell below $50/barrel on Thursday
Oil prices continued to fall for a third day on Friday on concerns that increased US production will dampen OPEC’s willingness to continue to cut output if prices continue to drop.
After reports of a large increase in US crude inventories and domestic crude production were released earlier this week, market confidence faltered.
In trading on Friday, US crude fell 84 cents, or 1.8 per cent, to $48.44 a barrel. Brent crude was down 90 cents, or 1.7 per cent, to $51.29 a barrel.
According to Reuters, selling appeared to accelerate in the afternoon after U.S. crude fell through the 200-day moving average of $48.68 a barrel.
The slide in prices began earlier in the week after the EIA reported US crude inventories had reached record highs. Supply glut concerns were fuelled on Friday when Baker Hughes announced another increase in the US rig count.
Since Tuesday, US crude has dropped nearly 9 per cent, in the biggest three-day decline since February, 2016. On Thursday, oil prices fell below $50/barrel for the first time since December.
“We have not seen production cuts undertaken by the world’s producers really alleviate the overhang in inventories,” Gene McGillian, manager of market research at Tradition Energy told Reuters.
Major oil producers like Saudi Arabia and United Arab Emirates expressed concerns that increasing production in the US shale industry would undo their efforts to restrict supply.
Amidst the price turmoil, US oil and gas drilling has picked up. Producers say they are planning to expand production in North Dakota, Oklahoma and other shale regions, and output has jumped in the Permian Basin.
Baker Hughes reported on Friday that US drillers added eight rigs in the latest week, lifting the rig count to 617, its highest since September of 2015.
According to Reuters industry insiders said that during a closed-door meeting, senior Saudi officials told US oil firms they should not assume OPEC would continue its supply cut pact to offset rising US production.
United Arab Emirates Energy Minister Suhail bin Mohammed al-Mazrouei told Reuters earlier this week the rise in US inventories was a “worry,” and that “investors need to be cautious not to bring so much production on line.”
Analysts are now concerned that OPEC may not be willing to cut output if prices continue to fall. At the CERAWeek energy conference in Houston this week, oil ministers from Saudi Arabia and Iraq said it was too early to consider if the cuts would be extended.
“To the extent that people are concerned that OPEC decides not to extend, you have a real concern about downside weakness, where breaking back below $40 a barrel I don’t think is out of the question,” said Tony Scott, managing director of analytics at BTU Analytics told Reuters in an interview.
US crude inventories ballooned 8.2 million barrels to a record 528.4 million barrels last week.
Morgan Stanley analysts said in a note to clients they still thought Brent crude would end this year higher, at around $62.50.
However, they also warned gains that resulted from the OPEC deal could be lost due to weak gasoline demand, more drilling and heavy long positions.
