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Oil Collapses to $45 as U.S. Shale Output Confounds OPEC Cuts

Oil Collapses to $45 as U.S. Shale Output Confounds OPEC Cuts

Oil slid below $45 a barrel for the first time since OPEC agreed to cut output in November as U.S. shale confounds the producer group’s attempts to pr

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Oil slid below $45 a barrel for the first time since OPEC agreed to cut output in November as U.S. shale confounds the producer group’s attempts to prop up prices.

In less than 10 minutes on Friday, U.S. futures slumped more than $1 amid a surge in volume. They have collapsed 8.6 percent this week, erasing all gains since the Organization of Petroleum Exporting Countries signed a six-month deal in November to curb production and ease a global glut. The decline is being driven by expanding U.S. output, which threatens to blunt the cuts even as OPEC and Russia move toward extending them into the second half.

While OPEC’s curbs drove oil in early January to the highest since July 2015, that increase encouraged U.S. drillers to pump more. The result has been 11 weeks of expansion in 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.

“Markets are losing faith that the global inventory glut will disappear on OPEC’s cuts,” said Michael Poulsen, an analyst at Global Risk Management Ltd.

West Texas Intermediate for June delivery dropped as much as $1.76, or 3.9 percent, to $43.76 a barrel on the New York Mercantile Exchange, and was at $45.06 at 8:55 a.m. in London. Total volume traded was about four times the 100-day average. The contract lost $2.30, or 4.8 percent, to close at $45.52 on Thursday.

Brent for July settlement slumped as much as $1.74, or 3.6 percent, to $46.64 a barrel on the London-based ICE Futures Europe exchange. Prices are down 7.1 percent this week, heading for a third weekly decline. The global benchmark crude traded at a premium of $2.60 to July WTI.

“There’s a lot of option-related activities so as the market falls through $45, the holders of short, put positions need to hedge,” said Mark Keenan, head of Asia commodities research at Societe Generale SA. “They need to sell futures and that can drive some very significant and volatile moves through those levels.”

See also: Oil market rout in charts: Producer woes, contango, volatility

Energy companies were set to end the week lower in Europe, even after the region’s major oil companies reported first-quarter earnings that beat expectations and showed that they were learning to adapt to a low-price environment. The Stoxx Europe 600 Oil and Gas Index is down 0.5 percent this week.

U.S. crude production rose to 9.29 million barrels last week, the highest level since August 2015, according to the Energy Information Administration. While OPEC is likely to prolong curbs for a further six months, American shale supply remains a concern, according to Nigeria’s oil minister.

OPEC will meet May 25 in Vienna to decide whether to extend supply cuts through the second half.

“There’s disappointment that the production cuts we’ve seen from OPEC and others have not had any impact at this stage on global inventory levels,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The market seems to be much further away from a balanced situation than some had previously forecast. There is a possibility that oil could be headed to the low-$40s range from here.”

Oil-market news:

  • Oil’s retreat stoked declines in other commodities from iron ore to industrial metals. The deterioration in sentiment also carried through to the currency market.
  • 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.
  • Russia thinks it will be necessary to extend its agreement to cut oil output in conjunction with OPEC beyond June, Energy Minister Alexander Novak said in an emailed statement Thursday.
  • Rosneft PJSC, Russia’s largest oil producer, said first-quarter profit climbed 8.3 percent as the effect of higher crude prices was offset by a stronger ruble and production cuts.