Oil drops to lowest since Opec deal, US crude below US$50 per barrel

[NEW YORK] Oil fell about 2 per cent on Thursday in heavy trade, extending the previous session's slump to prices not seen since an Opec-led pact to cut production was agreed, as record US crude inventories fed doubts about the effectiveness of the deal to curb a global glut.

US crude prices fell through the US$50 a barrel support level, with market participants unwinding some of the massive number of bullish wagers they had amassed after the deal.

The losses followed Wednesday's slide of more than 5 per cent, the steepest in a year, after data showed crude stocks in the United States, the world's top oil consumer, swelled by 8.2 million barrels last week to a record 528.4 million barrels.

But several analysts remained bullish on oil for the long term.

"Headline risk can capture the imagination of the market over the near term, but we see dips as short-lived, key buying opportunities," RBC analysts said in a note.

"Record high inventory levels are reason for pause, but we believe that the market is overly focused on US stocks... The US will be the last of the major regions to rebalance stocks given that storage capacity remains abundant, cheap and US shale is extremely elastic in a US$50-per-barrel price environment."

Brent crude settled 92 US cents, or 1.7 per cent, lower at US$52.19 a barrel. On Wednesday, the benchmark slumped 5 per cent, its biggest daily per centage move in a year.

US West Texas Intermediate crude (WTI) extended Wednesday's 5.4 per cent losses by 2 per cent, or US$1, to end at US$49.28 a barrel, the first time below the US$50-mark since mid December.

Trading volumes soared with a record high of more than 487,000 lots changing hands in front-month Brent crude, according to Reuters data that extends back to 1988. Over 1 million contracts in front-month WTI traded, the highest since the Opec cuts were announced on Nov. 30.

Brent and WTI hit respective session lows of US$51.50 and US$48.59, levels not seen since the Opec cuts.

Both benchmarks, however, were still within a tight range of about US$3-US$5 that they have been trading in since the Organization of the Petroleum Exporting Countries agreed with other major producers, including Russia, to curb output during the first half of the year in a bid to lift prices after a two-year rout.

"I still think we will stick in a fairly narrow range with the current levels reflecting the average price for the remainder of the year and a bottom of around US$40 and a top end of somewhere around US$60," said Chris Gaffney, president of EverBank World Markets in St Louis, Missouri.

Options trade also reflected hopes that prices would recover. Two of the three most actively traded options in US crude were the April US$50 calls with more than 24,000 lots traded and the April US$51 calls with more than 17,000 lots changing hands by afternoon.

"Given that we do expect OECD oil stocks to decline substantially this year helped by the large Opec cuts and robust global demand growth, we consider the recent drop in crude oil prices to be a good opportunity to enter into bullish option structures," strategists at Societe Generale said in a note.

But US drilling has picked up, with producers planning to expand crude production in North Dakota, Oklahoma and other shale regions. The Permian, America's largest oilfield, has seen output jump.

However, senior Saudi energy officials told top independent US oil firms in a closed-door meeting this week that they should not assume Opec would extend output curbs to offset rising production from US shale fields, two industry sources told Reuters on Thursday.

REUTERS