Brent drops from two-week high as U.S. warns of "phenomenal" surge

By Rakteem Katakey and Heesu Lee on 2/20/2018

LONDON and SEOUL (Bloomberg) -- Brent crude fell from a two-week high as the market weighed forecasts for a surge in U.S. production against OPEC’s success in accelerating the pace of draining a global glut.

Futures fell 1.1% in London. The outlook for U.S. oil production in both 2018 and 2019 is "phenomenal," Deputy Energy Secretary Dan Brouillette said in an interview. The latest discussions between OPEC and its allies concluded that the oversupply is dissipating at a faster pace than previously anticipated, people familiar with the matter said.

Oil is struggling to regain the highs of January after a sell-off in global equities seeped into crude markets earlier this month. Surging U.S. production continues to challenge efforts by the Organization of Petroleum Exporting Countries and its friends to alleviate a global oversupply, with forecasts pointing to record output from the Permian shale basin.

“Prices are vulnerable to the downside over the coming months,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich. “Though the market likes OPEC and its allies’ show of unity, we still need to see how U.S. shale companies will react on higher prices and eventually offset all the efforts of OPEC and others to reduce inventories.”

Cuts compliance

Brent for April settlement dropped 73 cents to $64.94/bbl on the London-based ICE Futures Europe exchange as of 1:55 p.m. local time. Prices rose 1.3% on Monday.

West Texas Intermediate for March delivery, which expires Tuesday, rose 0.2% to $61.79/bbl on the New York Mercantile Exchange. Monday’s transactions will be booked Tuesday for settlement because of the U.S. Presidents’ Day holiday. The more active April contract was at $61.69.

The increase in U.S. production is not “a blip,” Brouillette said. “We are optimistic about 2019 and 2020 too.”

The OPEC and non-OPEC Joint Technical Committee estimates that oil inventories are about 74 MMbbl above the five-year average and participants’ compliance with cuts was 133% in January, according to people familiar with the matter. The panel’s forecast for the market reaching equilibrium later this year assumes that Libya and Nigeria keep output at January levels and other participants in the deal maintain full compliance with cuts.

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