Oil Prices Continue to Fall as Doubts Over OPEC Agreement Build

Oil futures fell Friday as investors cashed in their recent gains and skepticism grew over a tentative agreement to cut production among members of the Organization of the Petroleum Exporting Countries.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in Novembertraded at $47.26 a barrel, down $0.57, or 1.2%, in the Globex electronic session. The November Brent crude on London’s ICE Futures exchange, which expires today, fell $0.67, or 1.7%, to $49.14 a barrel. The December contract fell 64 cents, or 1.3%, to $49.18 a barrel.

Oil prices have risen more than 7% over the past two sessions after OPEC caught the market off guard by reaching to a preliminary pact to slash the group’s output between 32.5 million barrels a day and 33 million barrels a day, down from the levels of 33.2 million barrels a day in August. A more definitive policy, including production cap for individual members, will be discussed and possibly ratified at OPEC’s next meeting on Nov. 30 in Vienna.

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After the initial knee-jerk rally, doubts have settled in as to whether the deal would materialize, given the longstanding tension among the members. Iraq has already said that it doesn’t trust the production numbers OPEC typically relies on.

Analysts also expressed concern that cartel members have not always been forthcoming about their production levels and have not abided by the quota in the past.

"OPEC has no way of enforcing the quotas,” said Jonathan Chan, an energy analyst at Phillip Futures.

The fact that OPEC was able to reach consensus on a production cut was seen as bullish, but analysts were less certain that it would result in supply being brought in line with demand in a market awash with oil.

"OPEC may have reasserted its relevance and shown that it still has the ability to exert influence on the oil market but it has quickly dawned on many that OPEC’s change of strategy may not be a panacea for the global oil glut,” said brokerage PVM.

Russia’s willingness to go along with the deal is also a wild card.

"Keep in mind most oil producers are private companies and logic would motivate them to increase output in response to higher prices,” said Mohab Kamel, a trader at the Geneva-based Magma oil.

U.S. shale producers, whose technology enables them to increase oil production quickly, may also swoop in and widen the spigots to capture the higher margins, analysts said.

Even without a collective cut, some say global output is already slowing. Upstream production in Venezuela, Gabon, India, Mexico and China has been falling since the initial onset of the price collapse in mid-2014.

Production by Saudi Arabia is also edging lower as the kingdom usually curbs its output in the winter months given lesser domestic demand for power generation. BMI Research expects a daily decline of 360,000 barrels in output between August and November this year.

Nymex reformulated gasoline blendstock for October — the benchmark gasoline contract — fell 1.4% to $1.42 a gallon. ICE gasoil changed hands at $439.25 a metric ton, down $5.50 from the previous settlement.

(Marketwatch)

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