Oil prices fall on oversupply concerns despite OPEC cuts

Oil prices
Oil prices fell in trading on Tuesday on concerns that OPEC cuts will not do enough to tackle the global oversupply of crude. QEP Resources photo.

Oil prices down over 1 per cent

Oil prices fell in trading on Tuesday as investors weighed concerns about the global over supply of crude and increasing US and Libyan production against the extended OPEC supply cut agreement.


Brent crude fell 76 cents to $51.53/barrel by 1:00 p.m. and US light crude was down 46 cents to $49.34.

Production at Libya’s Sharara field was down slightly to 784,000 barrels per day (b/d) because of a technical issue, but officials said the country’s biggest oilfield will see production rise to 800,000 b/d on Tuesday.

Libya along with Nigeria were excluded from the OPEC supply cut pact as the two countries had faced major unrest in their oil industries.  Most OPEC members along with some non-members, including Russia, have agreed to reduce their total production by 1.8 million b/d in an effort to reduce the stubborn glut.

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The pact was set to end in June, but the participants agreed last week to extend the deal until March 2018.

Despite OPEC’s efforts to cut the glut, inventories remain bloated and prices fell sharply after the cartel announced an extension to the deal on Thursday.

“The market is now in the hands of how market participants interpret the weekly and monthly fundamental snapshots with all eyes focused on total global oil inventory levels,” Dominick Chirichella, senior partner at the Energy Management Institute told Reuters.

Chirichella added “The market is looking for the OPEC/non-OPEC production cutting accord to result in a sustained inventory destocking pattern that will send global supply and demand balances back to normal historical levels.”

A 10 per cent increase in production since mid 2016 in the US oil industry is one of the factors affecting the global oversupply.  Last week, Baker Hughes reported US drillers added rigs for the 19th straight week, reaching 722, the highest since April 2015.

Reuters reports some of Tuesday’s selling pressure also came from banks and traders.

Analysts at Goldman Sachs have reduced their oil prices forecasts, arguing falling production costs for US oil will keep supply rising for years to come.  As well, once the OPEC cuts agreement expires, US and OPEC production will rise between 1 million to 1.3 million b/d between 2018 and 2020.

“While we are bullish on near-term prices as inventories normalize … 2018-19 futures need to be in the $45-$50 range,” Goldman said.