Oil slips on signs Russia boosted crude output before OPEC meets

By Tsuyoshi Inajima and Grant Smith on 6/11/2018

TOKYO and LONDON (Bloomberg) -- Oil extended declines as Russia was said to increase output before it meets with OPEC, adding to signs that a global coalition of producers is unwinding a pact to restrain supply.

Futures dropped 1.1% in New York after a third weekly loss. Russia, which along with Saudi Arabia is trying to garner support for lifting output limits, was said to have boosted production earlier this month to above the level envisioned by OPEC. Meanwhile, the number of rigs drilling for crude in the U.S. inched higher, signaling output may extend a record.

Oil is near a two-month low after Saudi Arabia and Russia indicated they’re ready to restore production in the second half of this year to offset potential supply disruptions in Iran and Venezuela. Russia’s apparent willingness to ease caps is in contrast with those two nations, which have little to gain from such a move since they have limited ability to raise output themselves.

“OPEC-led cuts have acted as an important pillar of price support in recent months and any relaxation in supply curbs will inevitably weigh on prices,” said Stephen Brennock, an analyst at PVM Oil Associates in London.

WTI for July delivery fell $0.69 to $65.05/bbl on the New York Mercantile Exchange. Total volume traded was about 17% below the 100-day average.

Brent futures for August settlement slumped $0.72 to $75.74 on the London-based ICE Futures Europe exchange, and traded at a $10.77 premium to WTI for the same month.

Futures on the Shanghai International Energy Exchange dropped 0.2% to 467.5 yuan/bbl.

U.S. Request

OPEC and its allies will meet in Vienna on June 22-23. Ahead of the summit, the U.S. government has quietly asked Saudi Arabia and some other producers to increase oil production by about 1 MMbpd, according to people familiar with the matter.

Saudi Arabia and Russia, among the countries with spare capacity to raise production, signaled last month they may restore output even though they hadn’t yet consulted most other producers. Oil prices have fallen more than 7% since the two nations made their proposal public.

Russia increased oil output to 11.1 MMbpd during the first week of June, Interfax reported, citing a person it didn’t name. That’s above the 10.95 MMbbl level envisioned by the country’s agreement with OPEC and allies.

Iran Rebuttal

“OPEC will not bow and obey” to U.S. pressure to increase oil production, said one of Iran’s representatives to the organization. The Islamic Republic -- and Venezuela -- have written to OPEC members urging them to unite against American sanctions, while Iran also complained that “fellow ministers” had tried to speak on behalf of the entire group, which is required to operate by consensus.

Meanwhile, Iraqi Oil Minister Jabbar al-Luaibi told Reuters last week that a production increase is not on the table as the market is stable and prices are good.

Oil Market News

In the U.S., drilling rigs targeting oil rose by one to 862 last week, the highest since March 2015, according to Baker Hughes data. Hedge funds reduced their WTI net-long positions by 3.3% to 313,450 futures and options during the week ended June 5, the lowest level since last October, according to the U.S. Commodity Futures Trading Commission.

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