Oil falls from three-year high as Trump pushes Saudis to pump more

By Sharon Cho and Grant Smith on 7/2/2018

SINGAPORE and LONDON (Bloomberg) -- Oil fell from the highest level in more than three years after U.S. President Donald Trump piled pressure on Saudi Arabia to increase output and tame prices.

Futures in New York dropped as much as 2.2%. Trump tweeted Saturday that Saudi King Salman bin Abdulaziz had agreed to effectively boost oil production to the kingdom’s maximum capacity in response to turmoil in Iran and Venezuela. While the White House moderated his assertion that evening, Trump demanded in a television interview aired Sunday that OPEC stop what he called its manipulation of the market and insisted the group pump more.

Oil rallied 8.1% last week as the U.S. pushed allies to halt imports of Iranian crude, compounding concern over tightening supply amid shrinking American inventories and disruptions in Canada and Libya. The latest threat to output may come from Mexico following the presidential vote, while American pressure could test the unity of OPEC after the group and its allies last month put together a delicate deal to ease production cuts.

“President Trump kept the oil market on tenterhooks with a number of his remarks at the weekend,” said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. “His message could hardly have been more blunt.”

WTI crude for August delivery declined as much as $1.64 to $72.51/bbl on the New York Mercantile Exchange, and traded at $73.77 in London. Prices rose $0.70 to $74.15 on Friday, the highest close since November 2014. Total volume traded Monday was 25% above the 100-day average.

The price for August futures was $1.71 higher than the September contract, gaining for a 10th day in a market structure known as backwardation that signals a shortage.

Brent for September traded at $78.52/bbl after falling as much as 1.6% to $77.99 on the London-based ICE Futures Europe exchange. The August contract, which expired Friday, added 5.2% last week. The global benchmark traded at a $6.48 premium to WTI for September, with the spread expanding for a second day.

Major Disruptions

On Friday, oil prices in New York and London jumped, fueled by major disruptions to production in Canada and internal conflict in Libya. The re-imposition of sanctions on OPEC’s third-largest producer, Iran, and Venezuela’s economic crisis are also adding to concerns of reduced global supply.

“Prices are likely to become more volatile over the coming months, caught between two narratives: oversupply concerns, and concerns over dwindling spare capacity,” said Giovanni Staunovo, an analyst at UBS Group in Zurich.

Trump tweeted that Saudi Arabia had agreed to pump 2 MM more bpd. While the White House and the Saudi Press Agency followed with statements that neither side cited a specific target, oil prices fell as traders speculated that even a chance of a Saudi boost would likely lower prices.

The latest from Trump follows sporadic criticism of OPEC by the U.S. president, who accuses the cartel of keeping prices artificially high at the cost of crude buyers. It also adds to complaints from China, the biggest oil consumer, and India, which has the fastest-growing appetite for energy, after prices rose despite OPEC’s June 22 decision to ease output cuts.

Separately, Mexicans elected Andres Manuel Lopez Obrador, their first left-wing president in decades. Lopez Obrador has said he’ll scale back reforms that have attracted oil majors. He’s also said that he may suspend new oil auctions, will review contracts already awarded and could temporarily freeze fuel prices -- measures that could reverse efforts by the current government to boost crude production and lure foreign investors.

Oil Market News

The number of rigs targeting oil in the U.S. dropped by four to 858 last week, a second consecutive weekly decline, according to Baker Hughes data. Libya’s National Oil Corp. declared force majeure on crude loadings at the Hariga and Zueitina oil terminals, according to a statement from the company.

Iranian crude exports may shrink by 700,000 to 800,000 bpd when renewed U.S. sanctions take effect in November, according to Reza Padidar, head of the energy commission of the Tehran Chamber of Commerce, Industries, Mines and Agriculture. Yuan-denominated futures for September delivery traded up 1.4% on the Shanghai International Energy Exchange, after adding 7.8% last week.

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