Crude pares gains as US supply concerns overshadow OPEC cuts

The market has largely priced in the production cuts that OPEC and other producers agreed in November, leaving little room for prices to break out of the range. (Reuters)
Updated 14 February 2017
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Crude pares gains as US supply concerns overshadow OPEC cuts

NEW YORK: Oil pared gains on Tuesday as concerns about rising supply from US shale output overshadowed an OPEC-led effort to cut global output, which has supported oil prices in a higher range.
Brent crude was 61 cents higher at $56.20 a barrel by 11:30 Eastern (1530 GMT), after earlier rising to $56.46 a barrel. US light crude was up 45 cents at $53.38.
The two benchmarks fell 2 percent on Monday. They are both now near the middle of $5-per-barrel trading ranges seen since early December.
The Organization of the Petroleum Exporting Countries (OPEC) and other exporters including Russia have agreed to cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017 in a bid to rein in a global fuel supply overhang.
The market has largely priced in the production cuts that OPEC and other producers agreed to in November, leaving little room for prices to break out of the range, said Tariq Zahir, managing member of Tyche Capital in New York.
“It would take either a supply outage or serious cuts to move it,” he said. “The first month, obviously, OPEC is going to do the best it can, but after that, let us see what the second and third month bring.”
Rising production in the US, where increased drilling activity especially by shale oil producers, has undermined these efforts. US crude output is up 6.5 percent since mid-2016 to 8.98 million bpd, its highest level since April last year.
US shale oil production for March is expected to rise by the most in five months to 4.87 million bpd, its highest rate of since May last year, government data showed on Monday.
“Oil just appears to be caught in a range at the moment and mainly focused on those supply considerations,” said Ric Spooner, chief market analyst at CMC Markets in Sydney.
Although OPEC countries are largely sticking to their agreement with compliance around 90 percent, investors suspect the cuts may not be maintained, preventing them from having a bigger impact on prices.
“OPEC producers want the market to believe they will stick to the agreed production freeze (cut). But lessons from the past have made the market deeply suspicious,” said Hans van Cleef, senior energy economist at ABN AMRO Bank in Amsterdam.
Many analysts say oil producers will have to cut production more quickly to drain the global oversupply this year.
“Based on OPEC’s own numbers the message is loud and clear,” said Tamas Varga, analyst at London broker PVM Oil Associates.
“Improve on compliance, cut production further and extend the deal for the second half of the year if you want to avoid yet another year of global oil inventory builds.”


Another surprise fall in UK inflation muddies Bank of England rates message

Updated 3 min 23 sec ago
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Another surprise fall in UK inflation muddies Bank of England rates message

LONDON: British inflation fell unexpectedly in April, according to figures on Wednesday that added to doubts about when the Bank of England will raise interest rates again and pushed sterling to its lowest level against the dollar this year.
Consumer price inflation cooled to 2.4 percent last month, its weakest increase since March 2017, and down from 2.5 percent this March.
The figure was below economists’ average expectation in a Reuters poll for it to hold steady at 2.5 percent and represented the second surprise fall in a row after a drop in March’s figures. “It’s a conundrum for the Bank of England which has struggled to read the direction of price changes recently,” Ed Monk, associate director for personal investing at fund manager Fidelity International, said.
“With inflation trending lower, it only makes it harder for the Bank of England to raise rates.” Investors were now pricing in a one-in-three chance of a BoE rate hike in August — the next time it updates its forecasts on the economy — down from 50/50 before Tuesday’s data.
High inflation, caused by the pound’s drop after the 2016 Brexit vote, squeezed British consumers through last year, and although it has receded from its December peak of 3.1 percent, the BoE is keeping a close eye on price pressures.
PIPELINE PRESSURE
Wednesday’s data pointed to some signs of inflation pressure still in the pipeline. Prices of goods leaving British factories increased at a faster rate than expected last month. And while consumer price inflation cooled again, the timing of the Easter holidays and their impact on air fare prices was a big contributor.
On Tuesday Bank of England Governor Mark Carney cited a new sugar tax on soft drinks, as well as higher utility bills and petrol prices, as reasons why inflation “probably tips up a bit” in the coming months before resuming a decline. The ONS said soft drink prices increased sharply over the last couple of months but the overall impact on inflation was minimal.
The latest data on prices in British factories, which eventually feed through onto the high street, were stronger than anticipated. Manufacturers increased the prices they charged by 2.7 percent year-on-year, matching March’s increase. Economists had expected a fall to 2.3 percent. Among manufacturers, the cost of raw materials — many of them imported such as oil — was 5.3 percent higher than in April 2017, up sharply from an increase of 4.4 percent in March and suggesting a long run of weakening price growth has ended.
A surprise drop in consumer price inflation in March, along weak economic growth figures for early 2018, had called into question whether the BoE would raise interest rates more than once before the end of the year.
Earlier this month it refrained from an interest rate hike that had at one point been widely expected. The BoE’s latest forecasts show inflation dropping to 2.1 percent in a year’s time, and returning to its 2.0 percent target a year later — but only if interest rates rise by 25 basis points about three times over three years.
The latest Reuters poll of economists suggests the BoE is most likely to raise interest rates at its August meeting.