Crude Prices Plummet on Oversupply Fears as Russia, Trump Set the Stage for More Output

Thursday May 2, 2019

The analytical question of whether or not global crude inventories are healthy if not over saturated was once again answered decisively by traders on Thursday, who took stock of news about U.S. sanctions on Iran being far less severe impact than initially feared and caused U.S. oil prices to drop almost 3 percent.

Heading for its biggest weekly fall since February, West Texas Intermediate plummeted $1.79, or 2.8 percent, to $61.81 per barrel, and Brent fared not much better: it dropped $1.43 per barrel, or 2 percent, to $70.75.

As U.S. president Donald Trump intensified his initiatives against Iran this week by halting waivers allowing eight countries including China and Turkey to do business with the Islamic republic, analysts noted that the roll-back of the waivers did not immediately lead to supply shortages - hardly a revelation in retrospect, but enough to motivate traders.

Indeed, Mohammad Barkindo, secretary general for the Organization of the Petroleum Exporting Countries (OPEC), told media on Thursday that "There is no need to repeat it: it is impossible to eliminate Iranian oil from the market."

Plus, as if to underscore the reluctance exhibited by major oil producing countries to curb their own production capabilities, Russia's output reportedly fell to 11.23 million barrels per day (bpd) in April from 11.3 million bpd in March - but remained above levels targeted in OPEC's cutback agreement.

It's worth noting that Russian officials such as Kirill Dmitriev, head of  RDIF, have signaled that the former Soviet Union wants to raise its output due to improving market conditions.

Trump himself is eager to see more oil on the market in order to reduce prices, and on Thursday it was disclosed that he has, via the rewriting of 2016 provisions, given offshore producers more flexibility by easing Obama-era spill mandates imposed in response to the 2010 Deepwater Horizon disaster.

The market on Thursday was also influenced towards the bearish side by Genscape forecasting that storage at the Cushing, Oklahoma hub had increased 1.95 million barrels between April 26 and 30, which comes on the heels of earlier news that U.S. stockpiles last week rose by 9.9 million barrels to 470.6 million barrels, as production hit a record high of 12.3 million bpd.

With the spring refinery maintenance season approaching, worries could intensify over rising supply and softening demand.

However, Tamas Varga, analyst at PVM Oil Associates, pointed out that the seemingly unstoppable rise of American producers could coax OPEC into action: "OPEC is like a tea bag; it works best in hot water...the U.S. oil market might just be providing the producer group with the perfect excuse to extend the production agreement for at least another six months."