Oil prices tank as OPEC deal on output cuts disappoints traders

Khalid Al-Falih, Saudi Arabia’s energy and industry minister, speaks to journalists ahead of the 171st Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Wednesday, Nov. 30, 2016. After weeks of often tense negotiations, OPEC ministers gathering in Vienna expressed renewed optimism about salvaging a deal to cut oil production and prop up global prices. Photographer: Akos Stiller/Bloomberg

Oil prices tanked early Thursday after OPEC reached an agreement to cap oil production for another nine months at the same level that couldn’t fix the oversupplied oil market this year.

The U.S. oil benchmark fell as much as 5.1 percent from $51.36 to $48.75 on Thursday, underscoring how much speculators had driven up the price based on rumors that Saudi Arabia might persuade its fellow OPEC producers to cut production even deeper than it had in the first five months of the year.

“You have enough people believing all the rumors and you’ll run the price way up,” said John Kilduff, an oil-market analyst and co-founder of Again Capital in New York. “The disappointment registers in the market in the form of heavy selling.”

Related: OPEC extends production cuts by nine months

Energy research firm Wood Mackenzie said Thursday that OPEC’s decision to extend production cuts through March 2018 hasn’t had any effect on its outlook for oil prices this year. But it will spur activity in U.S. oil patches.

“A firmer oil price will, we expect, further support the U.S. tight oil industry into 2018,” said Ann-Louise Hittle, vice president of research in macro oils for Wood Mackenzie. “Today’s decision in Vienna sends a signal of continued support for oil prices from OPEC which helps U.S. onshore drillers make plans.”

As OPEC’s key oil ministers talked up the possibility of extending cuts again on Thursday, U.S. oil prices edged up slightly but were still down $2.02 to $49.34 a barrel on the New York Mercantile Exchange.

Even after five months of deep oil-production cuts, international oil inventories remained well above the five-year average. And in the United States, oil companies have sent nearly 500 new rigs to oil patches in Texas, Oklahoma, North Dakota and elsewhere since this time last year.

“OPEC has just cleared the deck for U.S. shale producers,” said Jim Krane, fellow for energy studies at Rice University’s Baker Institute for Public Policy. “U.S. shale producers are going to be saying thank you by increasing supply. The question is whether OPEC and shale will be able to coexist or is shale going to steal all the gains from OPEC’s maneuver?”

Related: Permian drilling productivity will see first-ever decline in June, EIA says