Crude Oil Declines After OPEC Decides Not to Impose New Ceiling

Why Oil at $50 is 'Good News' for Credit Markets
  • Group chooses not to set production target at Vienna meeting
  • U.S. oil rig count rose second time this year: Baker Hughes

Crude dropped after OPEC decided to stick to its policy of unfettered output.

Futures fell on both sides of the Atlantic after closing on Thursday above $50 a barrel in London for the first time in seven months. While members of the Organization of Petroleum Exporting Countries rejected a proposal to adopt a new production ceiling, ministers were united in their optimistic outlook for markets. Prices extended losses after the number of rigs drilling for oil in the U.S. rose for the second time this year, according to Baker Hughes Inc.

Oil has surged about 85 percent in New York from a 12-year low earlier this year amid disruptions in Nigeria, Libya, Venezuela and Canada and declines in U.S. output. OPEC needs more time to come up with a new production ceiling, outgoing Secretary-General Abdalla El-Badri said after the meeting in Vienna, adding that it’s hard to find a target when Iranian supply is rising and significant Libyan volumes are halted.

"The good news yesterday was that OPEC is getting along better," said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC who helps manage $14.1 billion. "The pain inflicted on U.S. producers, which was their goal, also hurt OPEC members. A reconciliation process is taking place."

Output Ceiling

West Texas Intermediate oil for July delivery fell 55 cents to settle at $48.62 a barrel on the New York Mercantile Exchange. Prices slipped 1.4 percent this week after rising the prior three. Total volume traded was 33 percent below the 100-day average at 2:40 p.m.

Brent for August settlement slipped 40 cents, or 0.8 percent, to $49.64 a barrel on the ICE Futures Europe exchange. Prices closed Thursday above $50 for the first time since Nov. 3. The global benchmark crude closed at a 53-cent premium to WTI for August delivery.

Before the OPEC meeting, Saudi Arabia had floated the idea of reinstating a group production ceiling as a gesture to show it had no plans to flood the market and it was serious about making the gathering a success. Iran, which has rejected any cap on output as it restores volumes following the removal of sanctions in January, argued that a group quota would be meaningless.

For the Iranian Oil Minister’s verdict on the OPEC meeting, click here.

Better Atmosphere

Nevertheless, relations among OPEC members improved significantly after several acrimonious meetings, Iran’s Oil Minister Bijan Namdar Zanganeh said in an interview in Vienna Friday. 

Prices are recovering and the market is in good shape, said Saudi Arabia’s Oil Minister Khalid Al-Falih. Oil at $50 a barrel isn’t high enough to spark a significant production gain, he told reporters in his suite in a Vienna hotel.

Watch next: OPEC Members Find Unity in Oil's Direction

"The OPEC outcome was expected," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut. "The continuing decline in North American output and the idea that global growth will boost demand have pushed prices higher. Whether they are enough to push us decisively over $50 has yet to be seen."

Rigs targeting crude in the U.S. rose by 9 to 325, after 2 were dropped last week, Baker Hughes said Friday. Explorers have idled more than 1,000 oil rigs since the start of last year.

Rig Count

"The uptick for rigs might have prompted some people to think that there’s a supply side reaction to $50 oil," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "This is just one week’s data. This doesn’t change the fact that the rig count is down a great deal or represent the beginning of a recovery."

U.S. crude supply fell last week, an Energy Information Administration report showed Thursday. Production slipped 32,000 barrels to 8.74 million barrels last week, the 12th straight decline and the lowest since September 2014. Inventories dropped 1.37 million barrels to 535.7 million. Supplies reached 543.4 million barrels in the week ended April 29, the highest since 1929.

OPEC and oil-market news:

  • OPEC appointed Nigeria’s Mohammed Barkindo as the group’s new secretary-general. He pledged to focus on restoring unity and credibility.
  • Verbal interventions lose power over the oil market, Russia’s Energy Minister Alexander Novak said in Moscow Friday.
  • The Niger Delta Avengers, a militant group, claimed to have attacked pipelines connected to Nigeria’s Forcados and Brass River oil terminals in postings on an unverified Twitter account.
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