Crude edges off 3-month low, but glut worries fester

Crude prices inched up on Friday after dropping to their lowest in more than three months the session before, pressured by concerns that a global supply glut is proving stubbornly persistent.

U.S. West Texas Intermediate crude (WTI) was up 37 cents, or 0.8 percent, at $49.65 a barrel at 0604 GMT. It fell below $50 on Thursday for the first since mid-December, when OPEC and other producers agreed to cut output.

Brent crude was up 35 cents, or 0.7 percent, at $52.54 a barrel, having settled down 1.7 percent in the previous session and slumping 5 percent the day before in its biggest percentage decline in a year.

WTI is on track for a 7 percent decline this week, the biggest weekly drop since early November. Brent is heading for a 6 percent fall, also the biggest since early November.

Market confidence has taken a hit after a period of higher prices enticed more U.S. shale oil companies to drill more wells and as stockpiles have remained high.

“Steep price falls in the last two days amid building U.S. inventories show that the market remains concerned about the supply-demand balance,” NAB Group Economics said in a research note.

Data showed crude stocks in the United States, the world’s top oil consumer, swelled by 8.2 million barrels last week to a record 528.4 million barrels.

U.S. drilling has also picked up, with producers planning to expand crude production in North Dakota, Oklahoma and other shale regions, while output has jumped in the Permian, America’s largest oilfield.

That has undermined the bullish sentiment generated after the Organization of the Petroleum Exporting Countries (OPEC) and major producers including Russia agreed to cut production in the first half of this year to drain a global glut.

“Should data continue to confirm that the OPEC-Russia deal is holding, we expect a gradual uptrend this year, although if inventories remain elevated a rally will be less likely,” NAB said.

Senior Saudi energy officials told top independent U.S. oil firms in a closed-door meeting this week that they should not assume OPEC would extend output curbs to offset rising production from U.S. shale fields, two industry sources told Reuters on Thursday.

Energy ministers and senior oil executives are meeting this week at CERAWeek in Houston, the biggest U.S. gathering of the oil industry.

– Oil drops to lowest since OPEC deal, U.S. crude below $50/bbl –

Oil fell about 2 percent on Thursday, extending the previous session’s slump to prices not seen since an OPEC-led pact to cut production was agreed, as record U.S. crude inventories fed doubts about the effectiveness of the deal to curb a global glut.

U.S. crude prices fell through the $50 a barrel support level, with market participants unwinding some of the massive number of bullish wagers they had amassed after the deal.

The losses followed Wednesday’s slide of more than 5 percent, the steepest in a year, after data showed crude stocks in the United States, the world’s top oil consumer, swelled by 8.2 million barrels last week to a record 528.4 million barrels.

But several analysts remained bullish on oil for the long term.

“Headline risk can capture the imagination of the market over the near term, but we see dips as short-lived, key buying opportunities,” RBC analysts said in a note.

“Record high inventory levels are reason for pause, but we believe that the market is overly focused on U.S. stocks … The U.S. will be the last of the major regions to rebalance stocks given that storage capacity remains abundant, cheap and U.S. shale is extremely elastic in a $50 per barrel price environment.”

Brent crude settled 92 cents, or 1.7 percent, lower at $52.19 a barrel. On Wednesday, the benchmark slumped 5 percent, its biggest daily percentage move in a year.

U.S. crude extended Wednesday’s 5.4 percent losses by 2 percent, or $1, to end at $49.28 a barrel, the first time below the $50-mark since mid December.

Brent and U.S. crude hit respective session lows of $51.50 and $48.59, levels not seen since the OPEC cuts were announced at the end November.

Both benchmarks, however, were still within a tight range of about $3-$5 that they have been trading in since the Organization of the Petroleum Exporting Countries agreed with other major producers, including Russia, to curb output during the first half of the year in a bid to lift prices after a two-year rout.

“I still think we will stick in a fairly narrow range with the current levels reflecting the average price for the remainder of the year and a bottom of around $40 and a top end of somewhere around $60,” said Chris Gaffney, president of EverBank World Markets in St. Louis, Missouri.

Options trade also reflected hopes that prices would recover. Two of the three most actively traded options in U.S. crude were the April $50 calls with more than 24,000 lots traded and the April $51 calls with more than 17,000 lots changing hands by afternoon.

“Given that we do expect OECD oil stocks to decline substantially this year helped by the large OPEC cuts and robust global demand growth, we consider the recent drop in crude oil prices to be a good opportunity to enter into bullish option structures,” strategists at Societe Generale said in a note.

But U.S. drilling has picked up, with producers planning to expand crude production in North Dakota, Oklahoma and other shale regions. The Permian, America’s largest oilfield, has seen output jump.

However, senior Saudi energy officials told top independent U.S. oil firms in a closed-door meeting this week that they should not assume OPEC would extend output curbs to offset rising production from U.S. shale fields, two industry sources told Reuters on Thursday.

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