Oil extends slump as Saudi Arabia, Russia signal output increase

Robert Tuttle May 28, 2018

CALGARY (Bloomberg) -- Oil in New York headed for its longest run of losses in more than three months as Saudi Arabia and Russia consider raising output.

Futures dropped as much as 3.1% on Monday, following a 4% slump Friday. Saudi Arabia and Russia have signaled they’ll restore some of their curtailed output after OPEC and allied producers concluded they’ve succeeded in draining a global glut.

The rout that started last Tuesday has wiped out all of oil’s gains in May. Futures reached a 3 1/2-year high earlier in the month as U.S. President Donald Trump renewed sanctions on Iran and the Venezuelan crisis deepened.

“The market is now pricing in the possibility that OPEC is going to raise production,” Phil Flynn, an analyst at Price Futures Group in Chicago, said by phone. An 800,000- to 1-MMbpd increase would “barely” offset the expected loss from Iran and Venezuela but “the market is taking that as a big increase.”

WTI for July settlement fell $1.77, or 1.2%, to $66.68/bbl at 12:32 p.m. on the New York Mercantile Exchange. Trades will be booked Tuesday for settlement purposes because of the U.S. Memorial Day holiday. Total volume traded was about half the 100-day average.

Brent futures for July fell $1.13 to $75.58/bbl on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a $8.87 premium to WTI for the same month, on course to close at the widest gap since March 2015.

Demand worries

Higher crude prices are starting to affect demand, Daniel Yergin, vice chairman of consultant IHS Markit Ltd., said on Friday. He was echoing concerns voiced a week earlier by the International Energy Agency, which advises major oil-consuming nations. U.S. President Trump last month criticized OPEC for contributing to higher crude.

OPEC and its allies are likely to gradually raise oil output in the second half, Saudi Energy Minister Khalid Al-Falih said last week at the St. Petersburg International Economic Forum in Russia. He and his Russian counterpart Alexander Novak said that while scaling back the supply caps was “on the table,” no decision had been made.

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. “No decisions made by two countries or three countries are going to be taken,” he said Friday in an interview in St. Petersburg. “We respect all the member countries.”

President Vladimir Putin said last week that oil prices at $60 fully suit Russia and the country doesn’t want them to spiral higher. Anything above that level “can lead to certain problems for consumers, which also isn’t good for producers,” he said. OPEC and his nation don’t plan to stick to existing output cuts, he said.

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