Crude Down for a Second Week, but Analyst Sees Support for $70/bbl

by Ship & Bunker News Team
Friday June 1, 2018

With news from the Energy Information Administration that U.S. crude production earned a new monthly record by jumping 215,000 barrels per day (bpd) to 10.47 million bpd in March, West Texas Intermediate fell 3 percent on the week, making this the second week of declines for the benchmark.

WTI fell $1.23 to $65.81 per barrel, while Brent declined by 81 cents to $76.75 per barrel, good enough for a half a percent increase for the week compared to WTI's 3 percent loss.

In addition to the EIA's numbers, which come close to matching those of top producer Russia, Baker Hughes disclosed in a report released Friday that U.S. energy companies added two oil rigs in the week to June 1, bringing the total count to 861, the highest level since March 2015.

But as far as John Kilduff, founding partner for Again Capital, is concerned, the big news story for crude and something to monitor "is this emerged disconnect between Brent and WTI: this is a three-year high in the spread differential," he said, referring to Brent's premium over WTI futures remaining near three-year highs above $10 per barrel, having surpassed $11 on Thursday (due partly to a lack of pipeline capacity in the U.S. keeping a lot of output within the country).

But despite the differential as well as substantial recent losses for both benchmarks, at least one analyst believes there is something else to consider, namely the idea that prices won't keep falling because it will be tough for even record-breaking U.S. output to meet global demand.

Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions, told CNBC's Squawk Box, "I think it's temporary: I think the fundamental picture is still really strong [and] the market's getting a bit dislocated right now based on a risk-off sentiment."

Essner suggested that undue focus has been placed of late on everything from U.S. president Donald Trump's trade war with China (which by many counts seems to be fizzling out) to questions about the integrity of the European Union.

Instead, he noted that Venezuela's output has fallen by about 500,000 bpd this year and could drop by the same amount by the end of 2018, while U.S. drillers would struggle to boost output by more than 1.2 million bpd: "So we need every last barrel of those supplies to take us to where we need to balance the market."

Essner concluded that crude prices will likely settle around $70 per barrel, with futures rising to that level largely on supply-and-demand fundamentals; and Sadad Al-Husseini, founder and president of Husseini Energy Company, pointed out that if it drops below $70, the Organization of the Petroleum Exporting Countries (OPEC) would intervene: "Dropping below $70 would be clearly too low, so they're trying to coordinate their strategies ahead of the OPEC meeting on June 22."

Those who doubt Essner's contention that prices have been driven by sentiment need look no further than earlier this week, when exactly the same message issued by OPEC - that it would maintain its output reduction strategy but make adjustments to offset market imbalances if required - caused traders to first sell off in a panic and then a day later make prices jump by 2.2 percent.