Crude Prices Plummet as Saudi Output Escalates and Libya Resumes Production

Wednesday July 11, 2018

Presumably, U.S. president Donald Trump's grin was wider than that of the Cheshire cat with Wednesday's news that U.S. crude plunged more than 5 percent for its worst daily performance in over a year, as Saudi Arabia turned on the taps and Libya's production woes seemed to be over - for now.

Add the recent news that Canadian production will resume sooner than expected, and the crude market scenario is rapidly shaping up to be the exact opposite of what analysts and Trump bashers thought would happen, ie: one in which there is plenty of oil and perhaps a reduction of prices at the pump for Americans, rather than a shortage.

West Texas Intermediate ended Wednesday's session down a massive $3.73 to $70.38 per barrel, its biggest daily drop since June 2017; Brent plunged even further, by $5.46, to $73.40, its worst showing since February of 2016.

The declines were said to be triggered by Trump threatening to impose tariffs on another $200 billion in Chinese goods, thus raising fears of a worsening trade war that could compromise demand for oil; but Wednesday also saw the Organization of the Petroleum Exporting Countries (OPEC) announce that Saudi Arabia pumped at its highest level since the end of 2016: 10.5 million barrels per day (bpd) in June, compared to slightly over 10 million bpd in May.

That pushed production from OPEC to more than 32.3 million bpd in June, up 173,000 bpd from the previous month, according to the independent figures; Iraq posted the second-biggest increase in June, increasing output by 71,500 bpd to about 4.5 million bpd, and the United Arab Emirates and Kuwait raised output by 35,100 bpd and 27,300 bpd, respectively.

Also on Wednesday came news that National Oil Corp (NOC) had lifted a force majeure on four Libyan oil ports that had been closed since June and that production and exports from the terminals would "return to normal levels in the next few hours."

John Saucer, a vice president at Mobius Risk Group, remarked, "The headline on Libya was merely the trigger; the scope of today's sell-off is unequivocally a speculative washout."

Interestingly, talk of a tightening market that had dominated headlines for the past few weeks ceased abruptly with Wednesday's crude prices, and worry instantly shifted to the U.S. conflict with China.

Michael McCarthy, chief markets strategist at CMC Markets, remarked that "Trade concerns have bitten today; if these tariffs are introduced, there will be an impact on global growth and demand"; for the record, China is a top buyer of U.S. crude and has suggested it could tax American oil if trade tensions escalate.

As for what could happen to prices over the next few days, John Kilduff, founding partner at Again Capital, noted that "Breaking $72 on the chart is big, there's no real support: you're seeing some at $70, but we could go down to $64, where we took off from."

Wednesday's proof that crude prices can drop so dramatically and so quickly based partly on news that so many nations are easily upping output lends support to experts such as Barclays, which earlier this week insisted that increased output form the Saudis will keep prices anchored near $70 for the near term.