Crude oil futures eased in early Asia trade Friday as investors cashed in their recent gains amid skepticism that the Organization of the Petroleum Exporting Countries would carry out a production cut deal it tentatively agreed to on Wednesday.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in November CLX6, -1.11% traded at $47.50 a barrel, down $0.33, or 0.7%, in the Globex electronic session. November Brent crude LCOX6, -1.16% on London’s ICE Futures exchange fell $0.38, or 0.7%, to $48.86 a barrel.
Oil prices have risen more than 7% over the past two sessions after OPEC caught the market off guard by agreeing to a preliminary pact to slash the group’s output between 32.5 million barrels a day and 33 million barrels a day, down from the levels of 33.2 million barrels a day in August. A more definitive policy, including production cap for individual members, will be discussed and possibly ratified at OPEC’s next meeting on Nov. 30 in Vienna.
But prices quickly lost steam after the initial jump, as doubts settled in if group would ever materialize the deal given the longstanding tension among the members.
Analysts also expressed concern that cartel members have not always been forthcoming about their production levels and have not abided by the quota in the past.
“OPEC has no way of enforcing the quotas,” said Jonathan Chan, an energy analyst at Phillip Futures.
Even OPEC members, such as Iraq, are aware of the spotty track record and have voiced their own distrust in the production figures that OPEC relies on.
While market participants welcome the tentative deal, many are also wary of it, calling it a “fake agreement” because the Wednesday deal essential left market in the same state–amply-over supplied, said Fereidun Fesharaki, chairman of consultancy FGE.
“Although it is a fake agreement which does not mean anything, it still shows OPEC can talk to itself and non-OPEC and shows a light for the future. This is a successful move for OPEC,” he added.
Russia’s willingness to go along with the deal is also a wild card factor. “Keep in mind most oil producers are private companies and logic would motivate them to increase output in response to higher prices,” said Mohab Kamel, a trader at the Geneva-based Magma Oil.
U.S. shale producers, whose technology affords them to increase oil production quickly, may also swoop in and widen the spigots to capture the higher margins, analysts said.
Even without a collective cut, some say global output is already slowing. Upstream production in Venezuela, Gabon, India, Mexico, and China have been falling since the initial onset of the price collapse in mid-2014.
Production by Saudi Arabia is also edging lower as the kingdom usually curbs its output in the winter months given lesser domestic demand for power generation. BMI Research expects a daily decline of 360,000 barrel in output between August and November this year.
The deal, however, is not without merit. It helps to put a floor under prices and can be viewed as a “verbal market intervention helping offset the impact of a return of output in Libya and Nigeria,” the firm added.
Nymex reformulated gasoline blendstock for October RBZ6, -0.69% — the benchmark gasoline contract — rose 27 points to $1.4695 a gallon, while October diesel traded at $2.945.
ICE gasoil for October changed hands at $442.00 a metric ton, down $2.75 from Thursday’s settlement.
Source: MarketWatch
