Oil Prices Fall on Skepticism Over OPEC’s Efficacy

The Wall Street Journal
Oil Prices Fall on Skepticism Over OPEC’s Efficacy

Oil prices fell Tuesday as skepticism prevailed among traders and money managers about OPEC’s ability to successfully rein in production to the agreed level. The December contract for global crude benchmark Brent was down 0.94% at $50.40 a barrel while November deliveries of its U.S. counterpart West Texas Intermediate fell 0.88% to $48.38.

The recent rise in prices, sparked by the agreement within the Organization of the Petroleum Exporting Countries to lower production, has led to a divergence between the physical and paper markets, according to Olivier Jakob. The analyst from the Switzerland-based Petromatrix sad that the physical market is still oversupplied, whereas the paper market was now pricing in OPEC’s commitment to lower production to as low as 32.5 million barrels a day. “Nigeria and Libya are looking to bring more crude into the market, and this is why the recent rally was relatively modest,” Mr. Jakob said. “We had higher prices in June without the aid of an OPEC production cut agreement.” Other analysts are also starting to openly question the ability of OPEC to properly police production cuts, especially when some members won't be part of the agreement.

In a note, Norbert Rücker, head of commodities research at the Zurich-based bank Julius Baer, pointed to OPEC’s poor track record at enforcing quotas. He added that given the unlikelihood of OPEC reducing output to a level that could truly impact physical supply coupled with U.S. shale oil producers ramping up extraction as prices approached $50 a barrel, a return to $45 a barrel was probable. Meanwhile in the U.S., the weekly inventory forecast from industry-body the American Petroleum Institute is scheduled for release Tuesday.

Dominick Chirichella from the New York-based Energy Management Institute has predicted stocks to rise by 4 million barrels because of a large influx of Canadian crude via pipeline. October traditionally sees lower activity from U.S. refineries as many enter pre-winter maintenance periods. This could also be a factor that leads to crude stocks increasing. Nymex reformulated gasoline blendstock futures—the benchmark gasoline contract—was down 0,12% at $1.47 a gallon, while diesel futures fell 0.77% at $1.54. ICE gas oil futures changed hands at $449.25 a metric ton, up 0.22%.

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