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Pipes connect six Chevron Corp. oil wells being readied for hydraulic fracturing in the Permian Basin in this aerial photograph taken near Midland, Texas, U.S., on Thursday, March 1, 2018. Chevron, the world's third-largest publicly traded oil producer, is spending $3.3 billion this year in the Permian and an additional $1 billion in other shale basins. Its expansion will further bolster U.S. oil output, which already exceeds 10 million barrels a day, surpassing the record set in 1970.

(bloomberg)

(Bloomberg) -- Oil fell on speculation that growing shale production will stem the drawdown of inventories from the biggest U.S. hub.

West Texas Intermediate futures dropped 1.1 percent after a government report showed further expansion in shale output. Output from major U.S. shale regions is forecast to rise 131,000 barrels a day in April, government data show. Stockpiles in Cushing, Oklahoma, the delivery point for futures contracts, were little changed after 11 straight weeks of declines, according to a Bloomberg forecast. The spread between April and May futures narrowed to 3 cents.

“I would not at all be surprised if we see a slight build in Cushing for the first time in 12 weeks,” Thomas Finlon, director of Energy Analytics Group Ltd., said in a phone interview. “I see certain things going on with the pipelines, they are improving, I see diminished export flows due to the narrowing of the WTI-Brent values, and we are still in turnaround season.”

The spread between the first two WTI contracts has settled in backwardation, where prompt prices are higher than those for later delivery, every day since Jan. 22. Inventories at Cushing have fallen by more than half since November to the lowest since December 2014.

The spread is "dangerously close to switching from backwardation to contango," Bob Yawger, director of futures division at Mizuho Securities USA Inc., said in a phone interview. "That would be a very negative price development.”

WTI for April delivery fell 68 cents to settle at $61.36 a barrel on the New York Mercantile Exchange, after gaining $1.92 on Friday. The April-May spread narrowed 9 cents to 3 cents a barrel.

Brent for May settlement fell 54 cents to $64.95 a barrel on the London-based ICE Futures Europe exchange, and closed at a $3.62 premium to WTI for the same month.

Output from shale regions will reach 6.95 million barrels a day in April, the Energy Information Administration said in its monthly drilling productivity report. Permian Basin production led the way with an 80,000-barrel increase.

Fears over increasing U.S. production continue to weigh on producers and investors. Iran wants OPEC to work to keep oil prices at about $60 a barrel as an increase toward $70 will encourage shale oil output, the country’s Oil Minister Bijan Zanganeh said, the Wall Street Journal reported.

Some of the market’s uncertainty was echoed in money managers’ short-selling position. Hedge funds boosted bets on falling WTI prices by the most this year after American production surged to record levels, according to the U.S. Commodity Futures Trading Commission.

Other oil-market news:

  • Gasoline for April delivery sank 0.5 percent to $1.894 a gallon, while diesel fell 1.2 percent to $1.8647.
  • While OPEC has shown a high level of compliance with its pledged cuts, U.S. shipments eating into the cartel’s market share in Asia may prompt some nations to boost supplies, said Warren Patterson, a commodities strategist at ING Groep NV.
  • Italy’s Eni SpA won a contract with Abu Dhabi National Oil Co. for two offshore oil blocks in the Persian Gulf.

--With assistance from Tsuyoshi Inajima and Grant Smith

To contact the reporter on this story: Milana Vinn in New York at mvinn@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, David Marino, Carlos Caminada

©2018 Bloomberg L.P.

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