Oil Prices Slip on Fears of Lingering Oversupply

Oil prices held on to their gains on Tuesday, supported by continued hopes that major oil producers will extend production cuts until early next year in a bid to reduce global inventories.

Brent crude, the global oil benchmark, rose 0.83% to $52.26 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.90% at $49.28 a barrel.

Crude rallied following a joint statement on Monday from Saudi Arabia and Russia that indicated a pact by the Organization of the Petroleum Exporting Countries and external producers to cut output should be extended to the end of March 2018.

A formal decision is expected to be announced on May 25. An extension to March next year would have to be agreed by all the participants in the deal.

"Oil prices are taking a breather after having achieved considerable gains in recent days," said Commerzbank analysts in a recent report.

Late last year, OPEC and a handful of nonmember producers including Russia agreed to reduce collective daily output by about 1.8 million barrels a day in the first half of 2017 in a bid to bring global inventories back to their five-year average.

The market response to OPEC's promise to extend the cut has been subdued because oil cartel members chose to cut production but continued to export crude taken from their own stockpiles.

"They have complied on production cuts but not necessarily on exports," said Amrita Sen, chief oil analyst at Energy Aspects. "They have had refinery maintenance and destocked their own inventory."

Saudi Arabia accounts for about 70% of OPEC's crude stocks and the kingdom has reduced its inventory considerably. Saudi crude stockpiles were 75 million barrels below their October 2015 peak at the start of May, Energy Aspects said in a recent report.

Investors will only believe OPEC's action to reduce supply when they see crude stock drawdowns driven by a drop in imports from the Middle East, say analysts.

Furthermore, due to a record output from OPEC late last year, global inventories may yet prove difficult to reduce, said the International Energy Agency in a report on Tuesday.

Even if OPEC and external producers extended their production cuts into the second half of 2017, "stocks at the end of 2017 might not have fallen to the five-year average, suggesting that much work remains to be done in the second half of 2017 to drain them further," said the IEA.

Meanwhile, increased production from nations outside the production cut agreement could depress oil prices. Libya, Nigeria and the U.S., are some of the countries that have ramped up their output.

Libya's authorities said the country's output reached 800,000 barrels a day last week, the highest level since 2013, according to analysts.

In Nigeria, oil companies including Royal Dutch Shell PLC and Exxon Mobil Corp. have recovered from the vandalism that had forced some of their pipeline infrastructure offline. Nigerian production is now projected to reach 2 million barrels a day this year.

U.S. producers are also expected to continue ramping up their production, with Texas leading the way.

According to the Energy Information Administration, "Texas accounts for 95% of the 299 thousand barrels per day output increase in the main shale oil regions over the past three months," note analysts for Standard Chartered.

"We think the Delaware basin today represents a Texas boom on an historic scale, as spectacular as the East Texas oil field in the 1930s, " said analysts for the London-based bank in a recent report.

Later Tuesday investors will be watching for data from the American Petroleum Institute, an industry group that forecasts U.S. crude production and stocks.

"The indications from that data source is to see a strong rebound in crude oil imports, we will therefore approach the weekly U.S. report with a bias to see price-negative data for crude oil," said Olivier Jakob from Switzerland-based consultancy Petromatrix.

Nymex reformulated gasoline blendstock--the benchmark gasoline contract--rose 0.37% to $1.60 a gallon. ICE gasoil changed hands at $458.00 a metric ton, down $3.38 from the previous settlement.

Summer Said and Jenny W. Hsu contributed to this article.

Write to Neanda Salvaterra at neanda.salvaterra@wsj.com

Oil prices flipped to small losses Tuesday with concerns about strong imports to the U.S. erasing earlier gains tied to optimism about extended production cuts from the world's biggest exporters.

Light, sweet crude for June delivery settled down 19 cents, or 0.4%, at $48.66 a barrel on the New York Mercantile Exchange, snapping a four-session winning streak. Prices had climbed as high as $49.38 a barrel earlier in the morning before retreating.

That earlier rally had been continued momentum from a joint statement on Monday from Saudi Arabia and Russia that indicated a pact by the Organization of the Petroleum Exporting Countries and external producers to cut output should be extended to the end of March 2018.

But some data providers and analysts are putting out numbers that suggest more foreign oil is coming into the U.S. despite the output cuts from around the world, brokers said. That reinforces fears about OPEC's cuts failing to cause historically high U.S. inventories to shrink as quickly as some expected since OPEC's deal to cut production took effect in January.

The market response to OPEC's promise to extend the cut has been subdued because oil cartel members chose to cut production but continued to export crude taken from their own stockpiles.

"They have complied on production cuts but not necessarily on exports," said Amrita Sen, chief oil analyst at Energy Aspects. "They have had refinery maintenance and destocked their own inventory."

Investors will only believe OPEC's action to reduce supply when they see crude stock drawdowns driven by a drop in imports from the Middle East, say analysts.

Furthermore, due to a record output from OPEC late last year, global inventories may yet prove difficult to reduce, said the International Energy Agency in a report Tuesday.

A first-reading of the report may have given traders the impression IEA was saying the market was on its way to balance, playing a role in the early gains, said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. But then those other important elements of the forecast came into focus, he added.

"All the caveats they threw at you...kind of sent a mixed message," Mr. Flynn added. "The market is going to want to see if we're indeed seeing the OPEC production cuts finally start to show up in the U.S."

He expects a bigger move could be ahead when traders look for more evidence of that later this afternoon in fresh estimates of those inventory levels due from the American Petroleum Institute, an industry group that forecasts U.S. crude production and stocks. Official data from the U.S. government follows on Wednesday morning and could reset the course of the oil market for the next week.

Government data is likely to show that stocks of crude, gasoline and distillates, which include heating oil and diesel, all fell last week, according to The Wall Street Journal's weekly survey of 13 analysts and traders. The group expects crude storage levels likely fell by 2.2 million barrels in the week ended Friday. Their consensus average also forecasts a gasoline-stockpile decline of 900,000 barrels and distillates drawing down by 1.2 million barrels.

Gasoline futures rose 0.89 cent, or 0.6%, to $1.6043. Diesel futures added 0.68 cent, or 0.5%, to $1.5164 a gallon. Both settled at fresh three-week highs.

--Summer Said and Jenny W. Hsu contributed to this article.

Write to Neanda Salvaterra at neanda.salvaterra@wsj.com and Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

May 16, 2017 15:20 ET (19:20 GMT)