Oil steadies above 3-mth low, glut concerns persist

LONDON, March 11, (RTRS): Oil prices steadied on Friday after dropping to their lowest in more than three months, pressured by heavy oversupply despite OPECled production cuts.

Brent crude oil was down 10 cents at $52.09 a barrel by 14:45 GMT, after falling 1.7 percent on Thursday and 5 percent the day before in its biggest percentage decline in a year.

US crude was 5 cents lower at $49.23 a barrel. The contract fell below $50 on Thursday for the first time since December. US crude is on track for a drop of more than 7 percent this week, its biggest weekly fall for five months.

Market confidence faltered after news of another big rise in US crude inventories that have built steadily to record highs as US oil production has grown this year.

The Organization of the Petroleum Exporting Countries and other exporters including Russia agreed last year to cut output by around 1.8 million barrels per day in the first half of 2017, but so far the move has had little impact on inventory levels.

“Steep price falls in the last two days amid building US inventories show that the market remains concerned about the supply-demand balance,” NAB Group Economist Phin Ziebell said.

Crude oil inventories 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.

Expand

US oil and gas drilling has also picked up, with producers planning to expand crude production in North Dakota, Oklahoma and other shale regions, while output has jumped in the Permian, America’s largest oilfield.

That has undermined bullish sentiment and cast doubt on how long OPEC will be willing to cut output if prices keep falling.

Senior Saudi officials told US oil firms in a closed-door meeting they should not assume OPEC would extend output curbs to offset rising production from US shale fields, industry sources told Reuters on Thursday.

Analysts said they expected a period of market consolidation after the heavy falls this week, but there could be another sell-off if investors were forced to sell loss-making contracts.

“The market remains overwhelmingly long and any further weakness will force additional reductions,” Saxo Bank’s head of commodity strategy, Ole Hansen, told Reuters Global Oil Forum.

Morgan Stanley analysts said in a note to clients they still thought Brent crude would end this year higher, at around $62.50, and reach $75 by end-2020. Gold recovered on Friday from an early drop to five-week lows after a US non-farm payrolls report for February failed to meet elevated expectations, prompting a drop in the dollar and Treasury yields.

The Labor Department data, which showed US non-farm payrolls rose 235,000 last month, beat official forecasts but was not enough to satisfy those whose expectations had been boosted by a strong private payrolls number earlier in the week.

Hike

The figures shored up prospects for the Federal Reserve to hike interest rates this month, however. Anticipation of a March hike has put gold on track for its biggest weekly loss in four months this week.

Spot gold was little changed at $1,200.70 an ounce at 14:40 GMT, off an earlier low of $1,194.55, its weakest since Jan. 31. US gold futures for April delivery were down $2.70 an ounce at $1,200.50.

“Whisper estimates for job growth were probably a bit higher after the strong ADP (private payrolls) number,” Commerzbank analyst Carsten Fritsch told the Reuters Global Gold Forum.

“Jobs growth was stronger than expected, but wage growth remains subdued, so the last link to higher inflation is still missing,” he said. “That may keep the Fed at bay after the rate hike next week at least until June.”

Gold is sensitive to rising US interest rates as these increase the opportunity cost of holding nonyielding bullion, while boosting the dollar, in which it is priced. The metal remains vulnerable to signs real interest rates are increasing, analysts said.

“If we see ... hawkish comments from the Fed next week, we could break out of this longer-term downtrend in fixed income, in the 10-year yield, and that is going to change the game as far as real rates are concerned,” Mitsubishi analyst Jonathan Butler said.

“That is going to have a negative impact on gold.” Pointing to softening investor appetite, holdings of the world’s largest goldbacked exchange-traded fund, SPDR Gold Shares , fell 2.7 tonnes on Thursday, bringing the outflow for the week so far to 6.5 tonnes.