Oil slips as Libya resumes production

Crude-oil futures began the first quarter with modest losses Monday, edging down in choppy trade after Libyan oil output resumed over the weekend.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in May CLK7, -0.89% fell 9 cents, or 0.2%, to $50.51 a barrel. June Brent crude LCOM7, -0.82%  on London’s ICE Futures exchange eased 11 cents to $53.42 a barrel.

Oil prices logged their strongest weekly gains of the year last week after local militia in Libya cut oil output by around one-third, but officials said production had restarted on Monday.

“Libya had managed to resurrect its production to 700,000 barrels a day. The national oil company was looking to push that to 1.1 million barrels a day by August, but unfortunately you will have these stoppages in Libya,” said Harry Tchilinguirian, head of commodity strategy at BNP Paribas SA. “The good news is they tend to be a lot shorter.”

Bullish sentiment is also driven by views that despite rebounding U.S. production, output growth there isn’t fast enough to come close to offsetting the cuts being made by the Organization of the Petroleum Exporting Countries and others.

OPEC and powerhouse producers including Russia late last year agreed to pare their output by 1.8 million barrels a day through May, with the aim of reducing global inventories to five-year averages. So far, OPEC’s own data indicate a 94% compliance rate.

That, coupled with supportive statements from principal players such as Saudi Arabia and Kuwait to extend the reductions later into 2017, have boosted prices and brightened sentiment of late after future had fallen to their lowest levels since right before the deals were announced.

But some analysts say a closer examination of the deal shows a bumpy road ahead because producers might be tempted to turn their back on it and prices that remain nearly double last year’s lows.

“It is our base case that cuts will get extended,” said Scott Darling, head of regional oil & gas for Asia-Pacific at J.P. Morgan. “However, there are clear risks for intra-OPEC tension respect to the fact that the Saudis have not cut back their exports.” While the kingdom’s production has decreased, domestic crude demand from power generation has fallen due to ample supply of natural gas.

“As Saudis crude exports have remained relatively the same year-on-year, that could be an issue for some of the OPEC members,” Darling said, adding that could prompt the producers to re-engage in a battle for market share.

That view isn’t universally held, with anticipation of exports sliding ahead of and during the summer, when power demand climbs amid air-conditioning needs.

“Saudi Arabia holds the key because most of the other producers actually can’t afford to increase their productions without more investments,” said Grace Liu, research chief at investment firm Guotai Junan. She added that even though Iran, Libya, and Nigeria were exempt from the production-cut deal, their output growth have been slow.

Meanwhile, Nymex reformulated gasoline blendstock for May RBK7, -0.59% —the benchmark gasoline contract—fell 0.31 cent to $1.7061 a gallon and May heating oil HOK7, -0.50%  rose 0.5 cent to $1.5806 a gallon. May natural gas NGK17, -1.35%  fell 4.5 cents, or 1.4%, to $3.145 per million British thermal units.

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