Oil Nears $50 as Investors Temper Disappointment Over OPEC Deal

  • OPEC and allies agree to prolong curbs for nine months
  • Producers have more tools to support prices if needed: Russia

Energy Aspects' Sen Sees OPEC Cutting Exports in 3Q

Oil recovered some of its mojo, nearing $50 a barrel again, as investors tempered their disappointment over OPEC’s output agreement.

Futures rose in New York after slumping on Thursday. While many were frustrated by the accord to prolong current output levels through March, without deeper cuts or an exit plan, Saudi Arabia’s Energy Minister Khalid Al-Falih said the strategy is working and stockpiles will drop faster in the third quarter. Producers have more tools to support prices if needed, Russia’s Energy Minister Alexander Novak said in a Bloomberg television interview.

"The market overreacted," said Gene McGillian, manager of market research for Tradition Energy in Stamford, Connecticut. Investors will go back to monitoring inventory levels, and "going forward, the pendulum of the market is going to swing on the impact of the cuts on the massive inventories."

A price rebound got some traction in the past few weeks as Saudi Arabia and Russia rallied support for a deal ahead of their meeting in Vienna on Thursday. At the same time, stubbornly high U.S. inventories dropped seven weeks in a row. But they remain above the five-year average that OPEC has failed to break and production from shale plays keeps rising, limiting optimism that a supply glut will ease.

"I don’t think anybody really thought you were going to get bigger cuts, realistically," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. With the extension OPEC and its allies proposed already priced in, the inventory contraction is one of the main bullish factors, he said.

West Texas Intermediate for July delivery settled 1.8 percent higher at $49.80 a barrel at 1:30 p.m. on the New York Mercantile Exchange. Prices slumped 4.8 percent on Thursday.

Brent for July settlement closed at $52.15 a barrel on the London-based ICE Futures Europe exchange. The contract lost 4.6 percent on Thursday. The global benchmark crude traded at a premium of $2.35 to WTI.

See also: OPEC leaves market guessing on exit strategy after historic pact

The sharp sell-off on Thursday was a "knee-jerk" reaction as the market continues to digest the OPEC announcement, said Michael Tran, a commodities strategist at RBC Capital Markets in New York. The news "lacked the fireworks the market was initially hoping for," and investors will be hesitant until they see the cuts are working, he said.

Rising U.S. shale output won’t derail OPEC’s goals and a nine-month extension will “do the trick,” Al-Falih said Thursday after the meeting in Vienna. Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, said Kuwait’s Oil Minister Issam Almarzooq.

OPEC will face the test of defending market share and generating revenue growth as it transitions from the curbs, Goldman Sachs Group Inc. analysts including Damien Courvalin said in a May 25 report. Backwardation -- when near-term crude prices are higher than those for later months -- will be needed for the cuts to shrink the glut and prevent an increase in U.S. shale production, the bank said.

Oil market news:

  • After sparing its prized U.S. market from oil-output cuts, Saudi Arabia plans to "markedly" reduce exports to its political ally in the coming weeks in an effort to reduce swollen and highly visible crude inventories in the world’s biggest consumer.
  • Global stockpiles will fall in the second half after OPEC’s extension, Total SA Chief Executive Officer Patrick Pouyanne told reporters in Paris.
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