Oil takes a hit as major producers consider output boost

Anna Jefferson
May 31, 2018

"The stricter regulation on the fuels used by the shipping industry will result in booming demand for middle distillates that would boost crude oil demand by additional 1.5 million bpd, potentially sending oil prices to as high as $90 a barrel in 2020", Morgan Stanley said last week.

The drop was accompanied by relatively heavy volume suggesting some capitulation from the extreme long crude speculative positioning.

Futures in NY traded down 1.2 percent from the close Friday. A reversal of the 487,000 barrel-a-day cut by Saudi Arabia and Russian Federation would help plug that looming hole in production.

The short-term focus will center on the June 22 Opec meeting in Vienna.

The spread between Brent and WTI CL-LCO1=R stands at around $8.7 a barrel, the widest since March 2015 due to the depressed price of USA crude compared to Brent. This is because the falling oil output from crisis-hit Venezuela has in reality increased the production cuts to some 2.7 million barrels per day, Russia's energy minister has said.

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U.S. West Texas Intermediate was down 1.8 percent at $66.67 a barrel in NY, after climbing to as high as $72.83 on May 22. This after Brent crude oil reached and found resistance at $80/b, a level last seen in late 2014. The announcement caused a commotion in the market due to the fact that this is the first time since 2016 that an increase in the production is made.

The major trigger for the drop was instigated by none other than Saudi Arabia, the world's largest oil exporter and kingpin of the OPEC oil cartel.

Now, after it became clear that Moscow and Riyadh are talking about a possible increase of 1 million bpd, oil prices lost all they had gained since the beginning of the month within a week.

"There could be 4-5% increase in prices across the sector in the next two quarters if crude prices remain at existing levels", said Saugata Gupta, MD of Marico, the maker of Parachute hair oil and Saffola cooking oil.

The increase in US output caused a global supply glut, putting pressure on the oil prices.

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"The pace of the recent rise in oil prices has sparked a debate among investors on whether this poses downside risks to global growth", Chetan Ahya, chief economist at U.S. bank Morgan Stanley, wrote over the weekend in a note.

The group has to decide unanimously whether to adjust output, said Suhail Al Mazrouei, energy minister of the United Arab Emirates and holder of OPEC's rotating presidency.

US oil production has surged by more than 20 percent in the past two years to 10.73 million bpd.

OPEC has been monitoring OECD inventories closely, and not just because its target in the cuts was the OECD inventory five-year average.

Baker Hughes (BHGE) on Friday reported that the number of active US rigs drilling for oil (http://www.marketwatch.com/story/US-oil-rig-count-makes-biggest-weekly-climb-since-february-2018-05-25) rose 15 to 859 in the most recent week.

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