By Georgi Kantchev and Stephanie Yang
Oil prices declined Tuesday after a rally off the shutdown of a
key European pipeline prompted investors to take profits.
Light, sweet crude for January delivery settle down 85 cents, or
1.5%, at $57.14 a barrel on the New York Mercantile Exchange, after
fluctuating between gains and losses earlier in the day. Brent, the
global benchmark, fell $1.35, or 2.1%, to $63.34 a barrel.
Brent prices rose to the highest level since 2015 early Tuesday,
breaking above $65 after British refining and chemicals company
Ineos said it would shut down the Forties Pipeline System for
several weeks after discovering a widening crack. The pipeline
system delivers around 40% of U.K.'s North Sea oil and gas
production, carrying about 445,000 barrels of crude a day.
"The pipeline outage is the big driver right now," said Tom
Pugh, a commodities economist at Capital Economics. "When you take
out so much oil out of the market, that inevitably adds to the
tightness."
However, the market sold off as the $65-a-barrel milestone
prompted some investors to take profits on long positions, and led
producers to lock in prices and sell future output.
"You've seen increased producer hedging activity in addition to
profit-taking from the managed money crowd," said Tony Headrick, an
analyst at CHS Hedging.
Ineos said repairs of the Forties Pipeline System could take
several weeks after the worsening of an onshore hairline fracture
south of Aberdeen, Scotland. A small amount of oil has seeped from
the pipeline, the company said, but the leak has been
contained.
"You've got one of the most important pipes on the planet down,"
said Bob Yawger, director of the futures division at Mizuho
Securities USA Inc. However, fluctuations in oil prices raised
uncertainty about how long the pipeline would be under repair, he
said.
Lower prices "would imply to me that the start time on the pipe
has been shortened," Mr. Yawger said.
The outage comes as production cuts by the Organization of the
Petroleum Exporting Countries and other major producers like Russia
take oil off what has been an oversupplied market. Last month, OPEC
and its allies agreed to extend their production cuts by nine
months to the end of 2018.
"Even if you do not believe that the extension of the
OPEC/non-OPEC deal will boost the global rebalancing process, you
would have found it impossible to resist buying oil futures," said
Tamas Varga, analyst at PVM brokerage. The "closure of the Forties
pipeline system for weeks is one of the most significant unplanned
crude oil shortage we have seen this year," he said.
With some of the Forties crude underpinning the Brent crude
benchmark, the global price was rising faster than WTI benchmark.
This boosted the spread between Brent and WTI, trading around $7 a
barrel, a welcome development for U.S. exporters to Europe.
The run-up in prices, however, could also prove self-defeating,
as expensive crude incentivizes U.S. shale producers to ramp up
activity. The U.S. oil rig count -- the number of active rigs
drilling for oil -- has increased for three weeks in a row.
"The Forties outage gives U.S. producers a chance to get on the
market and hedge their output," Mr. Pugh said.
Producers typically take advantage of rising oil prices by using
hedges to lock in the higher levels. According to Citigroup, U.S.
suppliers sped up hedging activities for their 2018 production in
the third quarter. Over the course of the last quarter the hedge
ratio for 2018 production jumped from 12% to 27%, the highest level
of hedges since 2014, the bank said.
"High levels of hedge cover of 2018 production could bolster the
growth outlook for U.S. shale next year," the bank said in a
report.
Traders are also awaiting numbers due Wednesday from the U.S.
Energy Information Administration on how much crude oil still sits
in storage. Traders and analysts surveyed by The Wall Street
Journal expect crude stockpiles to have dropped by 2.9 million
barrels on average in the week ended Dec. 8.
The American Petroleum Institute, an industry group, said late
Tuesday that its own data for the week showed a 7.4-million-barrel
decrease in crude supplies, a 2.3-million-barrel rise in gasoline
stocks and a 1.5-million-barrel rise in distillate inventories,
according to a market participant.
Gasoline futures fell 1.7% to $1.6976 a gallon and diesel
futures rose 0.9% to $1.9336 a gallon.
--Neanda Salvaterra contributed to this article.
Write to Georgi Kantchev at georgi.kantchev@wsj.com and
Stephanie Yang at stephanie.yang@wsj.com
(END) Dow Jones Newswires
December 12, 2017 17:22 ET (22:22 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.