Oil prices drop amid output cut skepticism

Oil prices have continued to fall amidst growing doubts that the production-cut agreement between OPEC countries may not be effective to end global glut.

USA benchmark West Texas Intermediate crude oil prices edged up 29 cents, or 0.58 percent to $50.06 a barrel. U.S. West Texas Intermediate crude was at $51.39 a barrel, down 40 cents.

Crude oil prices declined for two consecutive sessions as traders sifted through the details of a decision last week from members of the Organization of Petroleum Exporting Countries to hold output at 32.5 million barrels per day starting in January. OPEC has invited 14 producers from outside the group to discuss further curbs at a Saturday meeting in Vienna.

OPEC’s cut in production is to take effect January 1 and is meant to re-balance the global oil supply and raise prices, according to a press release from AAA.

Importantly, Russia played a major role in negotiating the OPEC agreement to cut production, and therefore they will nearly surely play a major role in influencing participation by non OPEC producers to reach the 600,000 barrel mark or more.

Analysts are, however, increasingly skeptical about the OPEC and non-OPEC production pact holding, with oil prices slipping back slightly Tuesday.

Iraq can’t count on self-governed Kurds in the country’s north or worldwide oil companies to help it cut crude production as promised at an OPEC meeting last week. OPEC boosted production to 34.16 million barrels a day last month, according to a Bloomberg News survey, with Angola, Libya and Nigeria leading the gains.

Back in the US, weekly inventory data from the Energy Information Administration released Wednesday showed a large increase in stockpiles at the USA oil hub of Cushing, Okla. Energy Aspects called it the biggest weekly build since 2009.

Ultimately, oil prices are determined by many factors, not the least of which is the expectation of dramatic long-term growth in global demand.

“Gazprom appears to be the one and only beneficiary in Russian oil and gas from the pro rata 300,000 b/d crude oil production cut”, Aton analyst Alexander Kornilov said.

Even though OPEC managed to be true to the deal, US shale oil production will likely gain traction. While production will drop to 33.5 million barrels a day from January, there are doubts as to how tightly the cap will prove to be fitted.

WTI crude ETF United States Oil (NYSEARCA:USO), Brent crude ETF United States Brent Oil (NYSEARCA:BNO) and the largest energy ETF, the Energy Select Sector SPDR ETF (NYSEARCA:XLE), added about 3.8%, 5.1% and 1.4%, respectively (as of December 5, 2016) following the signing of the deal. Hence the forward curve has swiftly shifted to backwardation – where near-term prices are more expensive than those further out along the futures curve, as selling pressure pushes it lower.