Crude Continues to Fall as End of OPEC Oil Deal Moves Closer

by Ship & Bunker News Team
Tuesday May 29, 2018

Although U.S. crude on Tuesday tumbled 1.7 percent over concerns that the Organization of the Petroleum Exporting Countries (OPEC) may lift its output caps to ward off market tightening, one strategist said the cartel's influence simply isn't enough to avert a price spike that could see futures skyrocket to $100 per barrel.

The market on Tuesday sold off in advance of a June 22 OPEC meeting in Vienna, where it is said the cartel will decide to begin exiting its supply cutting agreement that has been active since January of 2017; West Texas Intermediate posted a fifth straight day of losses, down $1.15 at $66.73 per barrel.

Brent, however, rose 12 cents to $75.42, after dropping 5.6 percent over the last three sessions.

The emerging theory to explain the possibility of OPEC turning the taps back on is that U.S. president Donald Trump recently abandoning the Iran nuclear deal pleased rival Saudi Arabia, which is now being persuaded by Trump to put more barrels on the market - thus lowering prices and deflecting blame that he is responsible for high gas prices.

It's a view endorsed by Helima Croft, global head of commodity strategy at RBC Capital Markets, who pointed out that regardless of the quid pro quo, "the Saudis have higher revenue needs, so I think its going to be a fine line."

She speculated that OPEC and its allies could restore several hundred thousand barrels per day (bpd) as early as next month.

A contrary view was supplied by John Kilduff, founding partner of Again Capital: he pointed out that Tuesday's market sell-off "is going to work against a bigger number: [OPEC] is going to point directly to this price movement and say, 'See, it's all speculation, the market is just modestly balanced now for the first time in a couple of years.'

"And they're going to try to walk it back, so they're going to be very cagey over the next couple weeks."

But Bob Parker, investment committee member at Quilvest Wealth Management, said the efforts of OPEC, the Saudis, and even ally Russia wouldn't be enough to keep crude from spiking at $100 per barrel - that is, if there is soon a "complete collapse" in crude production from Venezuela.

Crude output in the Bolivian republic has dropped to about 1.4 million bpd in recent months and by nearly 40 percent since 2015, causing Parker to add that total collapse is "entirely possible."

For its part, Russia is trying to have it both ways with regards to the OPEC cuts: Alexander Novak, energy minister for the former Soviet Union, recently echoed the sentiments of his country's oil producers by stating that oil production restrictions could be eased "softly'; however, he has repeatedly said that the cutback initiative could be extended through 2019 if the market warrants.