Late reversal sends oil lower as bulls can’t kill fears of glut

Oil lost all of its gains in the last half hour of trading and skidded to a loss as a smaller-than-expected decline in U.S. crude stockpiles renewed fears a global glut. Futures in New York settled 1 percent lower on Wednesday.

Saudi Arabia has already announced production cuts on the order of 500,000 bpd for December. Russia has been non-committal, but it would seem likely that the group would agree to curb production to stop the slide in prices.

On the one hand, the meltdown in prices significantly increases the odds that OPEC+ will agree to curb supplies. The reversal for crude coincided with a loss of momentum in equity markets.

After all, the originally supply cut announced at the end of 2016 was intended to put a floor beneath prices. The group wouldn’t want to see prices crash all over again.

The U.S. Energy Information Administration said earlier in the day that American crude inventories had fallen 1.21 million barrels, well below the 10.2-million cited in an industry report Tuesday that had raised the market’s hopes.

“It raises the question of whether the OPEC cut is going to be enough to ease pressure on the market,” said Gene McGillian, market research manager at Tradition Energy in Stamford, Connecticut.

West Texas Intermediate for January delivery closed down 50 cents at $51.15 a barrel on the New York Mercantile Exchange, after earlier climbing close to $53. Brent settled down 5 cents at $60.15.

The global benchmark crude traded at an $8.79-a-barrel premium to WTI for the same month. Oil prices collapsed on Tuesday for the second time in a week. During midday trading, WTI fell below $55 per barrel and Brent dropped below $65 per barrel.

Both benchmarks are off more than $20 per barrel from their October highs. “Oil prices are under pressure in the face of ample supply, falling stock markets and an increasingly gloomy economic outlook,” Commerzbank said on Tuesday.

“In our view there is no doubt that production needs to be cut,” Commerzbank said. “This is also illustrated by the IEA’s latest estimates, which point to a massive oversupply on the global oil market next year if OPEC production remains unchanged.”

Tuesday also saw a plunge in global equities, which is dragging down all sorts of different sectors, including oil prices. “I think you’re going to see a risk-off type of market,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, told Bloomberg.

“It wouldn’t be surprising to see new lows being printed on oil” if crude stocks rise sharply. U.S. crude oil inventories likely rose by 3.5 million barrels last week, a sign that the surplus continues to build. In fact, concerns about a supply glut are growing by the day.

The IEA said in its November Oil Market Report that the global surplus could average 0.7 million barrels per day (mb/d) in the fourth quarter. The IEA says the current 0.7 mb/d surplus could balloon to 2 mb/d in the first half of 2019 based on the market’s current trajectory.

This situation is putting a lot of pressure on OPEC+ to take action next month. On the other hand, some analysts and traders are growing concerned that OPEC+ could stage a repeat of the 2014 meeting.

If one could pinpoint a single moment in time that crystallized the oil price meltdown between 2014 and 2016, it was the 2014 OPEC meeting. The market was caught off guard by the decision by the group not to cut production in the face of a mounting surplus.

The result was a steep selloff that continued more or less for the next two years. “I’m pretty sure the market doesn’t know what to think,” said Bart Melek, head commodity strategist at TD Securities in Toronto.

For a sustained oil rally, “you need someone to get long and right now I think everybody is gun-shy.” A warning from Iran about discord among OPEC members added to worries that major oil exporters won’t succeed with last week’s pledge to curtail output.

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