The Organization of Petroleum Exporting Countries and other major producers were unable to find common ground on an oil supply freeze over the weekend, initially sending crude oil prices plunging. However, oil-related exchange traded funds pared early loses Monday, with energy stocks among the best performers, after Kuwait strikes offset concerns over the failed oil freeze plans.
The Energy Select Sector SPDR (NYSEArca: XLE), the largest energy equity-based ETF, rose 1.7% Monday, erasing earlier losses.
Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, fell 0.8% and United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, dipped 0.1% on Monday as WTI crude oil futures declined 1.1% to $39.9 per barrel and Brent crude futures rose 0.2% to $43.2 per barrel.
Crude oil futures initially plunged as much as 6.8%, the most in two months, after the Saudi Arabia and Iran failed to find common ground during the oil freeze talks in Doha, Qatar over the weekend. Saudi Arabia declined to push forward with a supply limit at current levels if Iran continued to ramp up supply – Iran has been steadily increasing exports to pre-sanction levels.
However, oil prices turned around on as a labor strike in Kuwait, the fourth-largest OPEC member, cut output by about 60% to 1.1 million barrels per day, Bloomberg reports.
“Prices have recovered a bit of what they’d lost short term,” Mike Wittner, head of oil markets at Societe Generale SA, told Bloomberg. “Obviously, the Kuwait disruption is offsetting” the failure of the talks.
Kuwait oil workers are protesting cuts in pay and benefits after the Middle Eastern oil exporter diminished subsidies and government handouts in response to the plunge in crude prices. Virendra Chauhan, an oil analyst at Energy Aspects Ltd., projects that the strike could last 10 to 15 days – the government set up a joint committee to negotiate with the union over 10 days.
Consequently, the output loss from Kuwait could exceed the global surplus that brought oil prices to a 12-year low in February.
“If the potential loss of Kuwaiti crude supply is sustained long enough, that is roughly equivalent to current estimates for the global stockpile build in the second quarter,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA, told Bloomberg. “Of course, there is a big ‘if’ in terms of how long the strike will last.”
Additionally, looking at the energy sector, U.S. oil producers may be rallying on more optimistic earnings bets. The energy sector has suffered some of the most pessimistic first quarter projections, which leaves the oil producers a lot of room to surprise on the upside.
“Unless there’s a big move in crude people will wait to see what happens and will be watching earnings,” Matt Maley, an equity strategist at Miller Tabak & Co. LLC., told Bloomberg. “Revenues are down at these big banks but they beat expectations, they had already priced in negative earnings, and they were able to bounce. It may be a little tougher to get a beat-expectations rally in other sectors.”
[related_stories]Energy Select Sector SPDR