Market Watch, 26 Oct. 2016- Oil prices were depressed in early Asian trade Wednesday, dragged lower by a sharp growth in the U.S. crude inventories and rising prospects that a production cut deal proposed by the Organization of the Petroleum Exporting Countries could sour as its members continue to squabble.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in December CLZ6, -1.10% traded at $49.30 a barrel, down $0.66, or 1.3%, in the Globex electronic session. December Brent crude LCOZ6, -0.89% on London’s ICE Futures exchange fell $0.58, or 1.1%, to $50.21 a barrel.
Oil prices have been under pressure as disputes within OPEC appear to be escalating over the suggested pact to cap the group’s daily production to between 32.5 to 33 million barrels. In September, the group’s production reached 33.4 million barrels a day.
Iraq, the second largest OPEC producer, fired the first shot over the weekend by objecting to the deal, saying it needs the oil income to fund its ongoing war against Islamic State. Moreover, the country is contesting that its monthly production level is much higher than OPEC recognizes.
Production figures by suppliers are often higher than data reported by secondary sources. Oil veterans say this is because producers are incentivized to talk up their production levels, especially in the face of an imminent cut.
Analysts say Iraq’s refusal could entice smaller producers to also snub the deal or ask for special exemption. OPEC is scheduled to meet late November to iron out the details, such as output quotas for individual members.
“The only countries that can afford to cut production are Saudi Arabia and Russia but they would have the losing end of the deal if they are the only ones to cut,” said Jonathan Chan, a Phillip Futures energy analyst.
Russia’s unclear stance is also fueling uncertainty. It had previously signalled its willingness to join an OPEC cut, but recent comments by its oil officials show the country is likely pivoting away.
Russia’s OPEC envoy Vladimir Voronkov was quoted by a Russian media as saying that output cuts aren’t “an option for us.” Earlier this week, the head of Russia’s leading oil producer Rosneft also said the country still has spare capacity to raise production, if demand requires.
The bulls in the market, however, think that given OPEC members are mostly petro-dependent economies, they may opt to scale back or limit output for now in order to jumpstart prices.
“We think OPEC has endured low oil prices for far too long, with much damage already done on its fiscal space. That alone should coax the cartel to initiate a production cut,” said Barnabas Gan, an economist at OCBC.
The latest larger-than-expected growth in U.S. crude inventories was also clouding sentiment. Data by the American Petroleum Institute showed U.S. crude stockpiles surged 4.8 million barrels in the week ended October 21, compounding fears that the supply growth will outstrip demand for longer than expected. The growth is likely due to lower demand by the refineries on account of seasonal maintenance.
The industry group also reported a 1.7-million-barrel increase in gasoline stocks, while distillates likely dropped by 900,000 barrels. Analysts surveyed by the Wall Street Journal estimate a 2.1-million barrel build in U.S. crude stocks.
“The data is bearish relative to expectations,” said Tim Evans, a Citi Futures analyst.
Official figures by the U.S. Energy Information Administration will be released later today.
Nymex reformulated gasoline blendstock for November RBX6, -1.37% — the benchmark gasoline contract — fell 222 points to $1.4783 a gallon, while November diesel traded at $1.5503, 128 points lower.
ICE gasoil for November changed hands at $459.00 a metric ton, down $3.50 from Tuesday’s settlement.