Good news for U.S. oil producers made for bad news across the market in general.
Good news for U.S. oil producers made for bad news across the market in general.

The oil market rally that began around the start of 2017 seemingly ran out of steam in the first week of May, as great numbers from American producers made for bad news in the market as a whole. According to Bloomberg, analysts now expect the growth of U.S. crude production to completely overshadow any reduction in global supply caused by OPEC’s output reduction. The end result is a continuing trend of rising inventories, allowing oil to sell cheaply and giving the drilling industry a very hard time.

At the end of trading May 4, oil prices were down around 15 percent compared to mid-April. West Texas Intermediate crude briefly fell as low as $45 per barrel on Asian markets, while Brent crude reached a trough as low as $47 before recovering. West Texas Intermediate closed out trading on the New York Stock Exchange at its lowest price since Nov. 29, 2016, which was the day before OPEC finalized its production agreement, according to Bloomberg.

The slide in oil prices was bad enough to erase equity gains among many U.S. producers, too. Bloomberg reported that a few drilling and exploration companies, many of which had just released strong quarterly earnings, saw billions in market value wiped out as a result of sliding oil prices. Pioneer Natural Resources lost an estimated $1.44 billion in value in a single day. Others saw their stock prices fall 10 percent or more May 4.

Market loses faith in OPEC

As for the cause of the single-day crash, in all likelihood, continually strong numbers from U.S. shale producers are to blame. While OPEC’s total output has fallen to its lowest point in almost two years, output from the U.S. alone has reached a two-year high. At the start of May, U.S. drilling had reached 9 million barrels per day, roughly the same output level as OPEC just before it began its campaign to reduce production. Therefore, analysts became all but convinced that OPEC’s only option going forward was to continue cutting production.

The new slump in prices will likely weigh heavily on the heads of the oil cartel’s leaders, who are scheduled to convene in Vienna May 25 to discuss an extension of the cuts. It’s still unclear whether the group will come to an agreement on how to move forward, especially because the plan’s success depends on the cooperation of nations like Russia, which is not an OPEC member but still a major oil exporter.

But even if OPEC and company does agree to extend the cuts, market analysts are now more skeptical than ever that they will actually work to boost prices.

“The market appears to have temporarily lost faith in ever seeing an impact of the OPEC cuts on inventories,” Michael Cohen, head of energy commodities research at Barclays Plc in New York, said in an interview with Bloomberg. “We disagree and think that OPEC will manage to extend the cuts and we’ll see inventories fall in the second half of the year.”

As for U.S. producers and the refineries they support, the latest reports on gasoline demand don’t bode well, either. The Energy Information Administration reported that as of April 28, demand for gas was around 2.7 percent lower than a year earlier. This caused gasoline futures contracts to fall 3.4 percent, mirroring crude’s market performance as the worst since the day before the OPEC cuts began in November.