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Oil Slightly Higher But Continued Oversupply Keeps Pressure on Prices

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06/19/2017 | 12:31pm CET
By Christopher Alessi and Jenny Hsu 

Oil prices edged slightly higher on Monday, but analysts foresee little upward momentum for crude given the continued oversupply that has kept pressure on this market for three years now.

Brent crude, the global benchmark, was up 0.2%, to $47.44 a barrel, in London midmorning trading. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.1%, at $44.78 a barrel.

The price of Brent, the international benchmark, is now down around 58% since it hit a closing high of $115.06 a barrel three years ago. West Texas Intermediate, the U.S. gauge, is also around 58% lower than the $107.26 high it hit a day later.

Investors will likely "continue to cut positions until larger inventory declines materialize," Giovanni Staunovo, an energy analyst at UBS, wrote in a note Monday.

Despite the slight tick higher Monday, investors remain focused on the prospect of yet more oil supply.

The oil price started trading lower on Monday after U.S. data Friday showed the U.S. oil rig count increased for a 22nd consecutive week, with operators adding another six oil rigs last week.

Market participants were also concerned about the expected increase in Libyan and Nigerian oil output. Recent data suggests the two countries could add up to 250,000 barrels a day to the Organization of the Petroleum Exporting Countries' June output level, according to PVM Oil.

"Apart from U.S. shale [gas] these two member countries are also causing headache or even migraine for OPEC," PVM analysts wrote in a note Monday morning.

Overabundance of oil has suppressed prices for nearly three years. Even though major OPEC producers and Russia have cut some output since January, the market remains oversaturated and oil storage around the world remains in surplus.

The OPEC-led deal is keeping 1.8 million barrels a day off the market, but fading faith in the agreement's effectiveness has sent prices down 17% this year, reversing the gains seen when the deal was initially reached in late 2016.

"In short, the market appears to be testing Saudi and Russia's resolve to do 'whatever it takes to reduce global oil inventories,'" Mr. Staunovo added.

The bearish view is likely to remain the dominant sentiment in the short term. Recent options contracts show traders are hedging for the potential of oil falling below $41 a barrel in the months ahead, said Chris Kettenmann, chief energy strategist at New York-based Macro Risk Advisors. "It's a race to the bottom," he noted, adding that investors may be "betting on further downside."

Virendra Chauhan, an oil analyst at consultancy Energy Aspects, agreed: "Nothing fundamentally is going to push oil prices higher in the near term," he said.

Mr. Chauhan added he was looking ahead to Chinese trade data later this week. If it shows a continuing weakening of the Chinese economy it could also weigh on oil prices.

But, at current levels, some say a floor may be on the horizon. Questions about U.S. shale's "ability to keep profitable are being asked, " said Stuart Ive, a client manager at OM Financial. Meanwhile, firms such as Wood Mackenzie have said a limited amount of drilling equipment amid rising demand will likely slow down America's oil-drilling expansion.

At the same time, Helima Croft, the head of commodities strategy at RBC Capital Markets, questioned the sustainability of recently production gains in Libya and Nigeria. Ms. Croft said that political instability in those countries make them highly susceptible to insurgent uprisings.

Nymex reformulated gasoline blendstock--the benchmark gasoline contract--was roughly flat at $1.4503 a gallon. ICE gasoil changed hands at $422.75 a metric ton, roughly on par with the previous settlement.

Write to Christopher Alessi at christopher.alessi@wsj.com and Jenny Hsu at jenny.hsu@wsj.com

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