Crude-oil prices on Monday fell but traded off the day’s lowest levels after key producers failed to agree on a production cap that could have tightened up supply.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in May CLK6, -4.26% traded at $38.53 a barrel, down $1.83, or 4.6% in the Globex electronic session. June Brent LCOM6, -3.74% crude on London’s ICE Futures exchange fell $1.86, or 4.3%, to $41.26 a barrel.
The U.S. crude benchmark had tumbled more than 6% in Asian trading before paring some losses.
The sharp decline in oil spilled over to stocks world-wide, with Hong Kong’s Hang Seng Index HSI, -0.73% closing down 0.7% and Japan’s Nikkei Stock Average NIK, -3.40% off 3.4%, as the Japanese yenUSDJPY, -0.11% came close to reaching a fresh 18-month high. Elsewhere, the Stoxx Europe 600 SXXP, -0.33% fell 0.3%, and S&P 500 futures ESM6, -0.42% dropped 0.3%.
Over the weekend, Russia and heavyweight producers inside the Organization of the Petroleum Exporting Countries walked away from a much-anticipated meeting empty-handed. The group had gathered to discuss a production cap to limit output to January’s levels as a way ease the global oversupply.
The key driver behind the breakdown was Saudi Arabia’s refusal to participate in the deal without its geopolitical rival Iran pledging to do the same. Since economic sanctions against Iran were lifted in January, the country has vowed to keep ramping up production until output is back up to at least 4 million barrels a day.
Read: Oil freeze fails as Saudis insist that Iran participates
While the market has largely expected such a no-deal outcome, the prospect of a bigger glut at a time when demand growth is likely to slow still doesn't bode well with the sentiment.
"The market has mostly priced in the fact production rate will stay the same even before the meeting. But a failure to reach an agreement is bearish for sentiment and prices are likely to fall further later during the U.S. trading hours,” said Nelson Wang, an energy analyst at CLSA who forecasts U.S. oil prices to drop as low as $30 a barrel.
Hopes for a deal were a main catalyst in a rally that lifted U.S. crude prices more than 50% from their February lows. Much of those gains are likely to get wiped out, as oil producers might be looking to increase production to protect their market shares, analysts say.
Morgan Stanley warns that if the kingdom was to lift production from the current level of 10.2 million barrels a day to 11 million barrels a day as threatened, while other players also show no restraint, "rebalancing could be pushed all the way into 2018.”
Still, some market watchers are taking comfort in the declining production in the from of shale players in the U.S. Crude production in the U.S. is forecast to fall to an average of 8.6 million barrels a day in 2016 and 8 million barrels a day in 2017, said the U.S. Energy Information Administration.
"Now it is a question of speed to see if the rate of U.S. production decline can offset the growth in OPEC production. If not, the oversupply will linger longer and prices will stay depressed,” Wang said.
Nymex reformulated gasoline blendstock for May RBK6, -2.73% —the benchmark gasoline contract—fell 1.9% to $1.43 a gallon.
(Market Watch)
