Brent crude oil fell below $50 a barrel for the first time this year after US crude inventories climbed to a fresh record, raising fears that Opec’s attempts to tighten the market are falling short.
US crude inventories rose by 5m barrels in the week ended March 17, the US Energy Information Administration reported on Wednesday, triggering an immediate bout of selling that pushed Brent below $50 for the first time since November.
The latest price slump means Brent has reversed all of its gains since Opec agreed to cut production alongside allies like Russia late last year in an attempt to end the two-year price slump that has upended the oil industry.
It will heap pressure on the 13-member oil producers cartel to either increase cuts or roll over the initial six-month cut period when it meets in May, as signs of a rebound in US oil output is blunting their efforts.
“There are growing doubts among market participants about whether the Opec production cuts will be able to quickly restore balance on the oil market,” Carsten Fritsch at Commerzbank said. “[The cuts are] still failing to drive down stocks.”
Oil company stocks were hit by the latest price drop, which saw Brent hit a low of $49.71 a barrel, while US benchmark West Texas Intermediate dropped as low as $47.01 a barrel. BP, Royal Dutch Shell and ExxonMobil shares all slipped.
The rise in US crude stocks comes as shale drillers ramp up efforts after an earlier rebound in prices relieved the pressure on their balance sheets, which had been hard hit by the two-year slump.
US drillers have added rigs for nine straight weeks, leading analysts to revise up their forecasts for how much the country might produce this year. That poses a challenge to Opec who hoped the rebound in shale output would be limited.
Saudi Arabia, the most powerful member of Opec, has warned other producer nations who signed up to the supply reduction deal that they must comply with the cuts, saying the kingdom — which has shouldered the bulk of cuts so far — will not be taken for granted.
A report on Wednesday said that the kingdom may seek the involvement of Opec members that were previously largely exempt from the deal, such as Iran, should any deal be extended.
But one person close to Saudi policymaking denied the claim. “It is just too early to say [what Saudi will do in May],” he said.
Opec’s total compliance with the cuts has been above 90 per cent but that has been helped by Saudi Arabia cutting more than its allocated share. Non-Opec countries such as Russia have yet to meet their pledges.
Some analysts think they may need to enact a bigger reduction to have the impact they desire on the market and prices.
Between late 2014 and 2016, Saudi Arabia pursued a policy of raising output to try and squeeze out US shale and other high cost producers, but found the depth and extent of the price fall hit their oil-dependent economy hard.
“They did not do a big enough cut to begin with,” said Jamie Webster, a Fellow at the Center on Global Energy Policy at Columbia University. “Physical balances eventually win out and that is what is happening here.”