Crude Down as Saudis Said to be Revisiting Oil Cut Policy

Analysts insist oil prices are heading higher. File Image / Pixabay

Once again, fundamentals exacerbated the concerns of crude traders on Wednesday, with news of another surprise build in U.S. stockpiles resulting in the West Texas Intermediate benchmark dropping 1.2 percent.

WTI fell 79 cents to $64.73, its lowest closing in nearly two months, while Brent suffered a minimal decline of 5 cents to $75.33 per barrel.

In what is an increasingly familiar scenario, the Energy Information Agency on Wednesday disclosed that U.S. crude inventories rose 2.1 million barrels in the week to June 1, contrary to earlier estimates from analysts that a decrease of 1.8 million barrels would be reported; the EIA also said that U.S. crude output hit a record of 10.8 million barrels per day in the week.

While the numbers are in an of themselves a concern to those who worry about another global glut, Andrew Lipow, president of Lipow Oil Associates, pointed out that "The continuing increase in crude oil production is weighing on the market, and quite significantly compared to this time last year."

Also said to have affected Wednesday's market activity was Dharmendra Pradhan, oil minister for India, who told media that "For the first time, the Saudi oil minister called us and said 'we are revisiting our policy on oil output cuts'."

Pradhan is referring to the prospect of Saudi Arabia increasing production under the Organization of the Petroleum Exporting Countries (OPEC), in order to offset undue market tightening as a result of dramatically declining output in Venezuela and declining exports from Iran (as a result of the U.S. resuming sanctions against the Islamic republic).

Pradhan's remark builds on the rumours earlier this week of the U.S. government unofficially asking the Saudis and other OPEC producers to increase output - because of U.S. president Donald Trump's charge that the cartel had been artificially boosting prices under its output reduction initiative (for the record, India has also repeatedly expressed its frustration over rising oil prices).

The question is, what does all this mean for the crude market in the weeks to come?

Somewhat akin to a broken clock that can be relied upon to tell the correct time twice a day, the analytical community isn't shy about making predictions, and Daryl Guppy, a trader and special consultant to AxiCorp, proposed that the current price pullback is "not a change of trend, but it's instead just a temporary retreat."

Guppy supports his forecast with several features, most importantly a long-term group of averages that is well separated and shows strong and consistent investor support for a rising trend.

Relying almost entirely on averages, trend charts, and past performances, Guppy concludes that "The longer-term trading band target is near $76 and potentially higher; it is higher because the $76 level has no history of providing strong support or resistance."

Guppy's forecast will of course be tested when OPEC convenes in Vienna later this month to discuss the possibility of turning back on the taps; and if the taps are indeed turned back on, it's anyone's guess if the cartel will be able to keep its output reduction agreement intact, especially considering Iraq earlier this week sent strong signals that it wants to export on the open market whatever volume of crude it sees fit.