Oil Closes Near $46 as Shale Revival Cancels Out OPEC Efforts

Updated on
  • U.S. crude output rises in longest run of gains since 2012
  • Oil market volatility climbs to highest level since December

Oil Extends Slump Below $45 a Barrel

Oil closed near $46 a barrel in New York, back to levels last seen before the OPEC deal, as the shale revival appears to be making the group’s cuts ineffective.

After dipping below $44 Friday, futures pared this week’s decline to 6.3 percent. But, prices remain near their lowest since the Organization of Petroleum Exporting Countries signed a six-month deal to curb production in November. Meanwhile, shale drillers are pressing ahead with their longest expansion since 2011. Market volatility and trading volumes surged.

“What we’ve seen in terms of the rebound today is really just a bit of a correction following an oversold market over the past several days,” Michael Tran, a commodities strategist at RBC Capital Markets in New York, said by telephone.

OPEC’s curbs drove oil above $55 at the start of the year, encouraging U.S. producers to ramp up drilling. The result has been an 11-week expansion of American production, the longest run of gains since 2012. Prices are still more than 50 percent below their peak in 2014, when surging shale output triggered crude’s biggest collapse in a generation and left rival producers such as Saudi Arabia scrambling to protect market share. 

Oil market volatility, as measured by the CBOE/Nymex Oil Volatility Index, jumped to the highest level since December. The U.S. benchmark’s 14-day relative strength index hovered near 30, signaling the commodity is oversold.

West Texas Intermediate for June delivery rose 70 cents, or 1.5 percent, to settle at $46.22 a barrel on the New York Mercantile Exchange. Total volume was about 70 percent above the 100-day average. The contract sank 4.8 percent Thursday.

Brent for July settlement climbed 72 cents to settle at $49.10 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $2.50 to July WTI.

Amrita Sen, chief oil analyst at Energy Aspects, discusses the slump in oil prices.

Oil’s retreat Thursday stoked declines in other commodities from iron ore to industrial metals. The deterioration in sentiment also carried through to the currency market.

The selloff was also due to “broad macro concerns regarding the Chinese economy. The entire commodity space was weaker,” Tran said.

While OPEC is likely to prolong curbs for a further six months, American shale supply remains a concern, according to Nigeria’s oil minister. The U.S. oil rig count has more than doubled from a year ago to 703 this week, according to Baker Hughes Inc. data Friday. Nationwide crude production rose to 9.29 million barrels a day last week, the highest level since August 2015, according to the Energy Information Administration. 

Russia’s energy minister said Thursday that the country thinks it will be necessary to extend its agreement with OPEC beyond June. OPEC will meet May 25 in Vienna to decide whether to extend the deal.

“Clearly, the faith in the OPEC and non-OPEC deal has just been obliterated. There are whispers and rumors out there that the deal won’t even get extended,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by telephone. “The proof just hasn’t been in the pudding in terms of this accord.”

Oil-market news:

  • Oil’s slump to a five-month low is driven purely by technical trading and supply is still getting tighter, according to Citigroup Inc. and Goldman Sachs Group Inc.
  • From Exxon Mobil Corp. to Total SA, the world’s largest listed oil companies have sent a message to skeptical investors and rivals at OPEC: we can get by in a world of $50 a barrel crude.

— With assistance by Sharon Cho, Serene Cheong, Ben Sharples, and Grant Smith

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