By Christopher Alessi and Alison Sider
Oil prices fell Tuesday as signs of rising U.S. oil production weighed on prices.
Light sweet crude for April delivery fell 65 cents, or 1.06%, to $60.71 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 31 cents, or 0.48%, to $64.64 a barrel on ICE Futures Europe.
Investors are trying to gauge whether surging production from U.S. shale formations will threaten the process of bringing oil supply and demand into balance, and the tension has contributed to the seesawing prices, said Gene McGillian, research manager at Tradition Energy.
"There's a bit of a battle being fought," he said.
Prices rose in earlier trading, which analysts attributed in part to President Donald Trump's decision to fire Secretary of State Rex Tillerson, as Mr. Tillerson's ouster could undermine the nuclear deal that allowed Iran to increase production.
But attention turned to signs of rising production from U.S. shale formations, which is expected to increase by 131,000 barrels a day in April, to a record of 6.95 million barrels a day, according to the U.S. Energy Information Administration's latest drilling productivity report released this week.
"The rapidly growing U.S. shale production is making it virtually impossible for prices to rise," according to analysts at Commerzbank.
And producers are locking in prices above $60, which will allow them to continue pumping even as they placate investors who have called for more financial discipline, Goldman Sachs analysts said.
"Hedging has moved from normal levels to above-normal levels, aided by an increase in oil futures," the analysts wrote in a research note. "This should allow many producers to grow while spending within cash flow during 2018."
Technical factors exacerbated the move. For most of this year, near term oil prices have been higher than prices further into the future -- a structure known as backwardation that is generally considered a signal of a tight market that portends rising prices. But that could be starting to slip: the price of oil for April delivery has slipped below the price of the May contract.
That shift could prompt some investors to sell crude futures -- something that some hedge funds and other money managers have already been doing.
"The oil market is looking increasingly oversupplied," said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd., in a note Tuesday. "It appears that money managers are getting rid of their long positions and this is why the front-end spreads of the two main crude oil futures contracts have been drifting lower lately."
New indications of growing U.S. output come as the Organization of the Petroleum Exporting Countries -- which has been holding back output by 1.8 million barrels a day since the start of last year -- is divided over how high the price of oil should be. Saudi Arabia, the de facto leader of the oil cartel, would like prices at $70 a barrel or higher, while Iran would like them closer to $60 a barrel.
The split is driven by differing views over whether $70 a barrel would send U.S. shale companies into a production frenzy that could cause prices to crash.
And analysts are anticipating that the U.S. Energy Information will report Wednesday that stockpiles of oil rose by 2.5 million barrels last week. The American Petroleum Institute, an industry group, said late Tuesday that its own data for the week showed a 1.2-million-barrel increase in crude supplies, a 1.3-million-barrel fall in gasoline stocks and a 4.3-million-barrel decrease in distillate inventories, according to a market participant.
Gasoline futures fell 0.29% to $1.8863 a gallon. Diesel futures rose 0.49% to $1.8739 a gallon.
Write to Christopher Alessi at [email protected] and Alison Sider at [email protected]