Oil down 3 percent, set to end five-week rally as oversupply fears resurface

NEW YORK (Reuters) – Oil futures plunged 3 percent on Friday, and were set to end Brent’s longest multi-week rally in 16 months following profit taking and the return of oversupply concerns.

“Yesterday we had Russia and the Saudis talking about extending cooperation, and today we saw a little bit of backtracking with respect to additional cuts in production.” said Houston-based consultant Andrew Lipow. “What the market gained yesterday is clearly being given back today.”

Russia on Friday clarified remarks made by President Vladimir Putin about the oil market earlier this week, saying he did not propose extending a global oil output cut deal but said he recognized it was a possibility.

Benchmark Brent crude futures LCOc1 were down $1.73 at $55.29 a barrel by 11:30 a.m. EDT (1530 GMT), set for a 1.8 percent loss on the week and snapping a five-week winning streak that was the longest since June 2016.

U.S. West Texas Intermediate (WTI) crude CLc1 was at$49.23, down $1.56 or 3 percent on the day. It was set to close the week down more than 4 percent, the biggest weekly loss in four months.

The prospect of extended oil production cuts by the Organization of the Petroleum Exporting Countries and other producers led by Russia had supported prices in recent sessions.

Saudi Arabia’s energy minister said on Thursday he was “flexible” about prolonging the production-curbing pact until the end of 2018.

However, concerns linger about growing U.S. crude exports, due to a hefty WTI discount to Brent prices, which makes U.S. oil more competitive.

“We have a couple of bearish factors like a new record for U.S. crude exports, the reopening of Libya’s biggest oilfield, a new year high in U.S. crude production and the recent strength of the U.S. dollar,” said Frank Schallenberger, head of commodity research at LBBW in Stuttgart.

A stronger dollar .DXY, which makes greenback-denominated more expensive for buyers in other currencies, also led to further losses in the oil market on Friday. The dollar hit a 10-week high after data showing the largest gain in U.S. wages since December 2016 bolstered bets on an interest rate hike by year-end. [FRX/]

“I expect Brent to drop below $55 a barrel and WTI below $50 in the next couple of days,” Schallenberger said.

U.S. government data showed this week that crude exports had risen to a record of nearly 2 million barrels per day as domestic production grows.

The Baker Hughes’ report on the U.S. oil drilling rig count, an early indicator of future output, will be released at 1 p.m. EDT.

Investors were also watching Tropical Storm Nate as companies shut down some oil production in the Gulf of Mexico ahead of its expected arrival in the area as a hurricane on Sunday.

“The biggest impact (from Nate) could be on gasoline prices, depending on how many refineries are forced to shut down. But I don’t think we will see another bull run,” Schallenberger said.

In the Gulf of Mexico, BP and Chevron were shutting production at all platforms, while Royal Dutch Shell and Anadarko Petroleum suspended some activity. Exxon Mobil, Statoil and other producers have withdrawn personnel.

Additional production cuts are expected as the forecast track cuts through the heart of Gulf oil production, Lipow said.

Additional reporting by Henning Gloystein in Singapore and Karolin Schaps in Amsterdam; Editing by Marguerita Choy and Susan Fenton

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