US crude settles at $47.40, down 26 cents, following Middle East rift over Qatar

Oil well pump jack
Getty Images

Oil prices fell on Monday after top crude exporter Saudi Arabia and other Arab states cut ties with Qatar, raising concerns about a global deal to reduce oil production.

Saudi Arabia, the United Arab Emirates, Egypt and Bahrain closed transport links with top liquefied natural gas (LNG) and condensate shipper Qatar, accusing it of supporting extremism and undermining regional stability.

The news initially pushed Brent crude prices up as much as 1 percent as geopolitical fears rippled through the market. But Brent crude late reversed gains, trading down 50 cents, or 1 percent, at $49.45 a barrel by 2:34 p.m. EDT (1834 GMT).

U.S. West Texas Intermediate futures ended Monday's session at $47.40 a barrel, down 26 cents, or 0.6 percent. U.S. gasoline futures led the energy complex lower, falling about 2.4 percent to $1.5389 a gallon, on technical selling, brokers said.

With a production capacity of about 600,000 barrels per day (bpd), Qatar's crude output is one of OPEC's smallest but tension within the Organization of the Petroleum Exporting Countries could weaken the supply deal, aimed at supporting prices.

"While we would not want to read too much into this in terms of looming trouble for OPEC, the fact that Qatar's stance towards Iran is a key element in this issue does make for a potentially more complicated setup at future meetings should the issue not have been resolved in due time," JBC Energy analysts said in a note.

There are already doubts the effort to curb production by almost 1.8 million bpd is seriously denting exports.

While there was a dip in OPEC supplies between February and April, a report on Monday by Thomson Reuters Oil Research said OPEC shipments likely jumped to 25.18 million bpd in May, up over 1 million bpd from April.

Brent futures are still down nearly 9 percent from their open on May 25, when OPEC opted to extend production cuts into 2018.

Crude output in the United States, which is not participating in the cuts, has jumped more than 10 percent since mid-2016 to 9.34 million bpd, close to levels of top producers Saudi Arabia and Russia.

The rise in U.S. production has been driven by a record 20th straight weekly climb in oil drilling, with the rig count climbing by 11 in the week to June 2, to 733, the most since April 2015.

U.S. crude stockpiles, however, have consistently fallen for eight straight weeks, which had prompted some to suggest that the long-awaited effects from OPEC efforts to reduce world supply were materializing.

"We believe that U.S. inventories will continue falling this summer, allowing OPEC to point to lower stocks as a positive measure of success," Sandy Fielden, director of oil and products research at Morningstar said in a note.

"But if, as we have already seen, higher refinery runs and/or crude exports are the causes of these inventory drawdowns, then the impact on OPEC's balancing act is actually negative."

— CNBC's Tom DiChristopher contributed to this report.