Oil Down 2% on Stock Market Drop; Investors Question Production Cut Impact

Investing.com – A production cut should’ve been the most bullish story for oil this year, but traders aren’t buying it yet.

Just a day after rallying on the cuts promised by Saudi Arabia and its allies in the enlarged OPEC+, which includes Russia, another sharp selloff on Wall Street — along with global growth, trade war and Brexit worries — took oil down again.

U.S. crude was down $1.05, or 2%, at $51.56 per barrel by 12:35 PM ET (17:35 GMT), virtually erasing Friday’s gains as risk aversion gripped markets across the board. With just three weeks to the end of 2018, WTI remains down 15% on the year and 33% lower from four-year highs of nearly $77 per barrel hit in early October.

, the global benchmark for crude, was down by 88 cents, or 1.4%, at $60.79. Brent remains down 9% on the year and 30% lower from four-year highs of nearly $87 per barrel hit two months ago.

“OPEC resisted outside forces and pressure from President Donald Trump to cut production, only to have oil falter from outside market forces,” said Phil Flynn, analyst at Chicago’s Price Futures Group.

But the weakness from equities and global macro aside, traders and investors in oil are asking another question that could increase in resonance in the coming days and weeks: Is the 1.2 million barrels per day (bpd) cut pledged enough in the face of relentless U.S. supply?

On the surface, OPEC’s offer to reduce 800,000 bpd, while Russia and the rest cough up the balance of 400,000 bpd, is almost on target to the 1.3 million bpd the market predicted. But what the bigwigs who gathered in Vienna meeting last week seemed to have missed — or ignored out of convenience — is how much more U.S. supply could come on board if WTI gained by another $5 or $10 a barrel by the first quarter of next year.

The United States is already the world’s largest oil producer, churning out 11.7 million bpd, according to latest data, versus the 11.1 million bpd pumped by Saudi Arabia and 11.4 million bpd by Russia. Last week, the American energy sector earned another new distinction. For the first time in 75 years, the country became a net oil exporter, shipping more crude and oil products combined than it imported.

“We added 2 million barrels in the U.S. over the last one year with a 30% price gain,” John Kilduff, partner at New York energy hedged fund Again Capital, said. “So, logically, a 15% price gain could bring in another million barrels or more, enough to negate these cuts.”

Kilduff is betting that the majority of U.S. shale drillers have secured enough hedges at $60 to $70 per barrel to keep them going a year forward.

“Drilling-price efficiencies in shale get better according to the region, where in the Permian you can be profitable at even $40 a barrel versus the mid-to-high $50s you need in the Bakken. WTI at $55 to $60 over the next six months will be good for many U.S. drillers.”

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