Crude Flat Despite Record U.S. Output and Iranian Threat to Exit Oil Deal

by Ship & Bunker News Team
Thursday May 31, 2018

After dropping almost 2 percent on Thursday, U.S. crude prices steadied on Friday morning while Brent remained on course with modest gains, and one of the reasons for this, yet again, is said to be uncertainty over whether the Organization of the Petroleum Exporting Countries (OPEC) will relax its output reduction measures when the cartel meets to discuss the matter in Vienna next month.

OPEC and its allies - which have repeatedly stated that adjustments can be made to its reduction initiative to offset supply declines while maintaining the deal overall - have contributed significantly to a roller coaster week for crude prices, with Brent hitting a three-week low below $75 per barrel on Monday only to recover days later, and nervous traders sending West Texas Intermediate through similar price contortions.

Friday morning saw WTI rising 2 cents to $67.06 per barrel, and Brent climbing 17 cents to $77.73 per barrel.

ANZ in a note observed that "With the markets still concerned about supply-side issues in OPEC, this has pushed the Brent-WTI spread out to nearly $11/bbl, the highest level for three years"; for the record, concerns about U.S. bottlenecks are said to be contributing to the decline in U.S.futures as well.

As was the case earlier this week, traders seemed to be more concerned about rumours pertaining to OPEC than a report from the Energy Information Administration that U.S. crude production in March jumped 215,000 barrels per day (bpd) to 10.47 million bpd, a new monthly record; presumably they were buoyed by an accompanying EIA report that U.S. crude stockpiles fell 3.6 million barrels last week, exceeding expectations for a decline of 525,000 barrels.

Although the trading week is rapidly winding down, there is still plenty of room left for further market volatility, which could well be triggered by Iran on Thursday demanding a separate agenda at the next OPEC meeting to discuss support for the reinstatement of sanctions by the U.S.

Specifically, Bijan Zanganeh, oil minister for the Islamic republic, complained that "If these sanctions lead to lowering the Islamic republic's share from the oil market, after removal of the imposed, illegal restrictions, Iran will return to its normal production level as quick as possible and will not accept any restriction in this regard" - meaning, it would exit the OPEC cutbacks.

Iran initially enjoyed exemption for the cutbacks due to it having lost out from the previous sanctions that had been imposed by the U.S. between 2012 and 2016.

Even OPEC's harshest critics would agree the cartel is caught between a rock and a hard place: on one hand it wants to avoid market tumult of huge price spikes caused by a tight market, but on the other it doesn't want prices to decline too dramatically either - and as Mohammad Barkindo, secretary general for OPEC intimated earlier this week, high oil prices are necessary to motivate industry investment, which he pegs at about $10.5 trillion between now and 2040 to meet future oil demand.