Oil drops as Iran signals support for OPEC production rise

Commercial US crude inventories dropped by 5.9 million barrels in the week to June 15, to 426.53 million barrels, the Energy Information Administration said. (Reuters)
Updated 21 June 2018
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Oil drops as Iran signals support for OPEC production rise

  • Prices were prevented from dropping further by robust US fuel demand seen in record refinery runs, strong travel data and a large decline in crude inventories
  • Beyond the short-term, Barclays said there were headwinds for oil prices

SINGAPORE: Oil prices fell on Thursday as Iran signaled it could be won over to a small rise in OPEC crude output, potentially paving the way for the producer cartel to agree a supply increase during a meeting on Friday.
However, prices were prevented from dropping further by robust US fuel demand seen in record refinery runs, strong travel data and a large decline in crude inventories.
Brent crude futures were at $74.33 per barrel at 0426 GMT, down 41 cents, or 0.55 percent, from their last close.
US West Texas Intermediate (WTI) crude futures were at $65.50 a barrel, down 21 cents, or 0.3 percent.
Iran, a major supplier within the producer cartel of the Organization of the Petroleum Exporting Countries (OPEC), signaled on Wednesday it could agree on a small increase in the group’s output during a meeting to be held at OPEC’s headquarters in Vienna on June 22 together with non-OPEC member but top producer Russia.
“There appears to be an air of confidence that this deal will move through,” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage OANDA in Singapore.
“We expect OPEC and Russia to gradually add supplies back to the market by next year, mostly offsetting the almost 1 million barrels per day (bpd) supply disruption in Venezuela,” Barclays bank said.
Tehran had previously resisted pressure by OPEC’s de-facto leader Saudi Arabia to raise output.
Even with Iran appearing to fall in line, analysts do not expect a harmonious OPEC meeting.
“Our expectations are for a tense, discordant and highly geopolitical OPEC+ meeting,” said Japan’s Mitsubishi UFJ Financial Group in a note to clients.
OPEC, together with other key producers including Russia, started withholding output in 2017 to prop up prices, but a tightening market in 2018 led to calls by major consumers for more supplies.
In a sign of strong demand, US refineries processed a seasonal record of 17.7 million bpd of crude oil last week, according to data from the Energy Information Administration (EIA) said on Wednesday.
This comes as a record 46.9 million Americans are expected to travel during the upcoming July 4 holiday, according to the American Automobile Association on Thursday, which is seen as a leading indicator for US fuel demand.
Amid healthy consumption, commercial US crude inventories dropped by 5.9 million barrels in the week to June 15, to 426.53 million barrels, the EIA said.
US crude oil production was flat week-on-week, remaining at a record 10.9 million bpd.
Beyond the short-term, Barclays said there were headwinds for oil prices.
“Deleveraging in China and a weakening in the narrative around synchronous global economic growth are likely to add headwinds for all commodities,” it said.


Oil rises on expected OPEC cuts, but surging US supply drags

Updated 16 November 2018
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Oil rises on expected OPEC cuts, but surging US supply drags

  • Prices were mainly supported by expectations OPEC would start withholding supply soon
  • US output has surged by almost a quarter since the start of the year

SINGAPORE: Oil prices rose on Friday amid expectations of supply cuts from OPEC, although record US production dragged.
US West Texas Intermediate (WTI) crude oil futures were at $56.84 per barrel at 0353 GMT, up 38 cents, or 0.7 percent, from their last settlement.
Brent crude oil futures were up 48 cents, or 0.7 percent, at $67.10 per barrel.
Prices were mainly supported by expectations the Organization of the Petroleum Exporting Countries (OPEC) would start withholding supply soon, fearing a renewed rout such as in 2014 when prices crashed under the weight of oversupply.
OPEC’s de-facto leader Saudi Arabia wants the cartel and its allies to cut output by about 1.4 million barrels per day (bpd), around 1.5 percent of global supply, sources told Reuters this week.
However, Morgan Stanley warned a cut by the Middle East dominated producer group may not have the desired effect.
“The main oil price benchmarks — Brent and WTI — are both light-sweet crudes and reflect this glut,” the US bank said.
“OPEC production cuts are usually implemented by removing medium and heavier barrels from the market but that does not address the oversupply of light-sweet.”
Due to the structural oversupply that has emerged in the market from record production by many countries, Morgan Stanley said that “OPEC cuts are inherently temporary (because) all they can do is shift production from one period to another.”
While OPEC considers withholding supply, US crude oil production reached another record last week, at 11.7 million bpd, according to US Energy Information Administration (EIA) data published on Thursday.
US output has surged by almost a quarter since the start of the year.
The record output meant US crude oil stocks posted the biggest weekly build in nearly two years.
Crude inventories soared 10.3 million barrels in the week to Nov. 9 to 442.1 million barrels, the highest level since early December 2017.
This surge contributed to oil prices falling by around a quarter since early October, taking many by surprise.
“Oil bulls, us included, have capitulated and we no longer see oil climbing to $95 per barrel next year,” Bank of America Merrill Lynch said in a note.
While sentiment has turned bearish, some analysts warn that 2019 could be tighter than expected.
“We expect 2019 oil demand to reach 101.1 million bpd,” natural resources research and investment firm Goehring & Rozencwajg said, up from just under 100 million bpd this year.
At the same time, the firm said production outside North America was set to disappoint.
Add OPEC’s expected supply cuts, and Goehring & Rozencwajg said “those investors who are able to adopt a contrarian stance ... and stomach the volatility ... are being presented with an excellent investment opportunity” to buy into oil after the recent slump.
Bank of America agreed, saying “we believe oil is oversold and will likely bounce up from the current levels, as OPEC+ dials back production in December.”