Oil prices dip 16 cents, settling at $50.42, as speculators take profits after rally

Key Points
  • Investors take profits after bullish bets hit record high.
  • Some worry demand may falter in the fourth quarter.
  • North Sea crude supply is expected to fall in November.
Pumpjacks in an oil field.
Paul Giamou | Aurora | Getty Images

Oil prices dipped on Tuesday as speculators took profits for a second day after big third-quarter gains, but prospects for reducing the global crude glut lent support.

U.S. crude futures ended Tuesday's session down 16 cents at $50.42. The contract sank more than 2 percent in the previous session.

December Brent crude futures were down 24 cents at $55.88 a barrel at 2:26 p.m. ET (1826 GMT), having lost almost 2.5 percent on Monday.

Brent notched up a third-quarter gain of about 20 percent, the biggest increase for that quarter since 2004, and traded as high as $59.49 last week, but has since fallen about 6 percent.

Money managers have pushed their bullish bets on the Brent crude market to a record high in the last week, encouraged by signs of rebalancing between supply and demand.

Ed Morse: Recent rally due to fundamentals
Ed Morse: Recent rally due to fundamentals

But when positioning becomes too stretched, this can lead to abrupt shifts in the price.

"It's always problematic when you have this amount of speculative length in the market," Petromatrix strategist Olivier Jakob said.

"The price action ... for me is all about positions and potentially profit-taking on some of those speculative positions."

Oil briefly rose on Tuesday following comments from OPEC Secretary-General Mohammad Barkindo that compliance with the oil output cut deal between OPEC and non-OPEC nations is extremely high. He added that the global oil cartel was looking forward to strengthening its cooperation with Russia.

Last week prices rose on tension in Iraqi Kurdistan after the region's independence vote, with Turkey threatening to close a pipeline that brings oil from the region in northern Iraq to the Mediterranean. Turkey has not carried out the threat.

The recent rally had also been driven by signs that a three-year crude glut is easing, helped by a production-cutting deal among global producers led by OPEC.

However, Middle Eastern oil producers are concerned the price rise will stir U.S. shale producers into more drilling and push prices lower again. Key OPEC producers consider a price above $60 as encouraging too much shale output.

Commodities tomorrow: OPEC output on the rise
Commodities tomorrow: OPEC output on the rise

"Any time we get above 50 dollars a barrel drilling starts to ramp up, and thats going to bring the price of oil back down again," said Mark Watkins, regional investment manager at U.S. Bank.

He also noted that the summer driving season has come to an end, pushing down demand as autumn begins.

"Tomorrow's report well have to look at that data," he said, referring to the Energy Information Administration's closely watched weekly crude market report.

In the last 25 years, U.S. crude generated an average return of -7.5 percent and traded positive 40 percent of the time in the fourth quarter, according to a CNBC study using hedge fund analytics tool Kensho.

Offering a small boost was the expected drop in supply next month of the four largest North Sea crude grades that underpin the dated Brent benchmark.

— CNBC's Tom DiChristopher contributed to this report.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.