Oil set for first monthly drop since August on U.S. supply fears

By Sharon Cho and Angelina Rascouet on 2/28/2018

SINGAPORE and LONDON (Bloomberg) -- Oil is poised for its first monthly decline in half a year as January’s rally fades on growing fears over booming U.S. shale supply.

Futures in New York were down 0.1%, putting them on course for a 2.7% drop in February. An industry report was said to show U.S. oil inventories rose last week, which would be the fourth expansion in five weeks if confirmed in government data. The head of OPEC plans to dine with shale producers in Houston next week at a time when America is pumping at record levels and threatening the group’s efforts to curb a global glut.

After the best start to the year in more than a decade, oil has had a tumultuous month. Prices tumbled early in February following a global asset rout, only to recoup some losses as equities rebounded. While output curbs by OPEC, a supply disruption in Libya and turmoil in Venezuela have helped underpin prices, expanding U.S. shale production continues to haunt the market.

“Basically what investors are weighing is U.S. shale versus OPEC right now,” Tamas Varga, analyst at PVM Oil Associates said by phone. “It’s not clear yet who will be the winner as U.S. oil production keeps going higher despite the OPEC cuts.”

WTI for April delivery fell $0.07 to $62.94/bbl on the New York Mercantile Exchange, on course for the first monthly decline since August. The drop this month comes after prices rallied 37% in the five months through the end of January. Total volume traded was about 27% below the 100-day average.

Brent for April settlement, which expires Wednesday, dropped $0.09 to $66.54/bbl on the London-based ICE Futures Europe Exchange. The contract lost 1.3%, or $0.87, on Tuesday. The more-active May contract was little changed at $66.51. The global benchmark crude traded at a $3.59 premium to April WTI.

U.S. Data

The API was said to report U.S. oil stockpiles rose by 933,000 bbl last week. Government data Wednesday is forecast to show inventories increased by 3 million barrels, according to a Bloomberg survey.

U.S. crude output is forecast to rise to a record level in February, stoking fears that shale producers may derail OPEC’s strategy of reducing output to clear a global glut. The producer group’s Secretary General, Mohammad Barkindo, said he will meet with U.S. shale company executives for dinner on Monday in Houston, the second time he has met with some of the cartel’s top rivals.

Events in OPEC members Venezuela and Libya have also influenced oil’s course this month. Libya’s exports from a key port will be “modified” after protests disrupted production, putting the nation’s output at risk of a decline again. In Venezuela, crude output could fall to 1.1 MMbpd by year-end, according to consultancy Rapidan Energy Group, as the U.S. leans toward imposing oil-sector sanctions before elections in April.

Oil Market News

Growing U.S. shale production may push OPEC and its allies to “elect a more permanent form of cooperation” after the supply-cut agreement expires this year, according to BNP Paribas. U.S. crude output is set for a record in February, with the monthly average hitting 10.072 MMbpd, a Genscape report said Monday. Oklahoma is tightening its rules for fracking after studying a new cluster of earthquakes in one of the hottest U.S. regions for drilling.

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