Oil prices dip on profit-taking and U.S. production fears

2017 10 03T022050Z 2 LYNXNPED92033 RTROPTP 0 USA OIL COMPENSATION 1 - Oil prices dip on profit-taking and U.S. production fears
FILE PHOTO: A pumpjack brings oil to the surface in the Monterey Shale, California, April 29, 2013. REUTERS/Lucy Nicholson/File Photo

October 3, 2017

By Julia Simon

NEW YORK (Reuters) – Oil prices dipped on Tuesday as speculators took profits for a second day after big third-quarter gains and on concerns that higher prices might spur increased U.S. shale production.

Brent crude futures <LCOc1> closed down 12 cents or 0.2 percent to $56.00 a barrel, having lost almost 2.5 percent on Monday. U.S. crude <CLc1> futures fell 16 cents or 0.3 percent to $50.42.

Brent notched up a third-quarter gain of about 20 percent, the biggest increase for that quarter since 2004, and traded as high as $59.49 last week, but has since fallen about 6 percent.

Money managers pushed bullish bets on the Brent crude market to a record high in the last week, encouraged by signs of rebalancing between supply and demand. [O/ICE]

But when positioning becomes too stretched, this can lead to abrupt shifts in the price.

“You’ve reached a place where the market needs a drumbeat of positive information to sustain a rally,” said Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut.

“The question is if demand and the supply cut are enough to offset the increase in [U.S.] production that’s coming.”

Oil rose slightly on Tuesday following comments from OPEC Secretary-General Mohammad Barkindo that compliance with the oil output cut deal between OPEC and non-OPEC nations is extremely high. He added that the global oil cartel was looking forward to strengthening its cooperation with Russia.

Last week prices rose on tension in Iraqi Kurdistan after the region’s independence vote, with Turkey threatening to close a pipeline that brings oil from the region in northern Iraq to the Mediterranean. Turkey has not carried out the threat, analysts said.

However, Middle Eastern oil producers are concerned the price rise will stir U.S. shale producers into more drilling and push prices lower again.

“Any time we get above 50 dollars a barrel drilling starts to ramp up, and that’s going to bring the price of oil back down again,” said Mark Watkins, regional investment manager at U.S. Bank.

He also noted that the summer driving season has come to an end, pushing down demand as autumn begins.

“Tomorrow’s report we’ll have to look at that data,” he said, referring to the Energy Information Administration’s closely watched weekly crude market report that comes out Wednesday morning.

On Tuesday at 4:30 p.m. EDT the American Petroleum Institute publishes its weekly data.

Offering a small boost was the expected drop in supply next month of the four largest North Sea crude grades that underpin the dated Brent benchmark.

(Additional reporting by Amanda Cooper in London; Editing by Louise Heavens and Cynthia Osterman)

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