Crude Falls on Further Expectations of OPEC Boosting Output

Analysts say that even a modest production boost will result in $65-$70 oil. File Image / Pixabay

A delayed reaction to remarks made Thursday by Russia that the Organization of the Petroleum Exporting Countries (OPEC) may decide to boost production later this month resulted in a substantial drop for crude on Friday, with Brent plummeting $2.50 to settle at $73.44 per barrel, and West Texas Intermediate settling $1.83 lower at $65.06 per barrel.

Brent was on track to end the week down more than 4 percent, while WTI looked to fall 1.7 percent, and the dismal end-of-week performance caused Bob Yawger, director, energy at Mizuho, to remark, "We're going into an OPEC meeting where everyone is talking about raising production - the only question is by how much."

Expectations are the losses could intensify next week, but not due to worries over OPEC: instead, on Friday China announced $50 billion in tariffs in response to a series of recent levies by U.S. president Donald Trump; crude oil and other energy products were included for tariffs at a later date.

Noting that the U.S. of late has exported an average 363,000 barrels per day (bpd) of crude oil to China, John Kilduff, founding partner at Again Capital, said, "They were a big outlet, and we're going to notice it; it'll take time for other buyers to absorb that crude."

Still, OPEC will continue to dominate the thoughts of analysts and traders up to its June 22 meeting in Vienna; and CNBC on Friday theorized that the cartel, as fractious as it is, will reach consensus on easing its production caps, with any increase being gradual and limited.

Ed Morse, head of global commodities research at Citigroup, forecast that Saudi Arabia along with Kuwait and the United Arab Emirates will likely push for a 500,000 bpd hike and hold another half a million barrel increase until a future review.

Michael Cohen, head of energy markets research at Barclays, predicted that OPEC will increase output by 700,000 to 800,000 bpd through the end of the year, which he said will put Brent at an average of $70 per barrel this year and $65 next year.

Presumably, prices will drop further if the prediction of Francisco Blanch, head of global commodities research at Bank of America Merrill Lynch, comes true: he thinks output will increase by about 200,000 bpd each quarter, eventually adding 1.2 million bpd by the end of next year.

Which would suit emerging economies such as that of India just fine: Dharmendra Pradhan, oil minister for that country, said during a meeting with OPEC ambassadors that current oil prices were not only not supported by market fundamentals, but had also "gone beyond the threshold which can be sustained by the world."

But as far as some western producers are concerned, the motivation for OPEC to turn back on the taps - to avoid a market tightening caused by rapidly declining Venezuelan and other member countries, coupled with restrictions of Iranian crude exports due to sanctions - has been oversold.

Brian Gilvary, chief financial officer for BP, said his company still hadn't seen indications of declining production in U.S. shale as well as non-OECD countries such as the Middle East, and he doesn't foresee a shortfall in oil supplies in the coming years due to a dramatic fall in investments across the sector: "We're not seeing under-investment coming through yet."

The worry over OPEC's possible course of action later this month kicked into high gear earlier this week thanks to Alexander Novak, energy minister for Russia, who said "the parameters of up to 1.5 million bpd could be considered" when the cartel convenes in Vienna.