Oil prices dip as US output rises, but still on pace for monthly gains

CNBC

  • Oil markets remain supported by OPEC-led production cuts.
  • A weakening dollar has also supported crude futures.
  • However, U.S. production is expected to hit 10 million barrels per day soon, and Canadian output is also rising.

Oil jack pumps are pictured in the Kern River oil field in Bakersfield, Calif.

Jonathan Alcorn | Reuters
Oil jack pumps are pictured in the Kern River oil field in Bakersfield, Calif.

Brent crude oil prices eased below $70 a barrel on Monday as rising U.S. output undermined efforts led by OPEC and Russia to tighten supplies, but prices were still on track for a monthly gain.

Brent crude futures were down 92 cents, or 1.3 percent, at $69.60 a barrel by 10:58 a.m. ET (1558 GMT), while U.S. West Texas Intermediate (WTI) crude futures fell 79 cents, or 1.2 percent, to $65.35 a barrel.

So far this month, the Brent crude price has risen by 5.5 percent through last Friday’s close.

One of the key drivers has been the dollar, which has lost about 3 percent against a basket of major currencies so far this year.

Prince Alwaleed’s release is a relief for oil  

The decline was exacerbated last week when U.S. Treasury Secretary Steven Mnuchin suggested President Donald Trump‘s administration favored a weaker currency.

A falling dollar tends to support oil, which is priced in the U.S. currency, by making it cheaper for holders of other currencies.

Support has also come from a large premium in the front-month Brent oil contract over those for future delivery, as investment in crude futures and options reached a new record high last week.

“The market is bullish. One side that could correct significantly could come from the strength in the U.S. dollar,” PVM Oil Associates strategist Tamas Varga said.

“Undoubtedly, whatever the strategy is of Donald Trump and his finance ministry, they managed to support oil prices in the last week by talking the dollar down, so if we see a big (upward) correction in the dollar then we’ll probably see a (downward) correction in oil.”

In the last couple of months, oil has tended to move inversely to the dollar, as weakness in the currency makes it cheaper for non-U.S. investors in crude to buy and vice versa.

Despite generally bullish sentiment, analysts said the market had been dented by rising output in North America.

The ‘wobbly leg’ in oil markets  

U.S. crude production has grown by over 17 percent since mid-2016 to 9.88 million barrels per day (bpd) in mid-January. It is expected to break through 10 million bpd soon.

U.S. energy companies added 12 oil rigs drilling for new production last week, taking the total to 759, energy services firm Baker Hughes said on Friday.

U.S. production is already on par with top exporter and OPEC kingpin Saudi Arabia. Only Russia produces more, averaging 10.98 million bpd in 2017.

There are also signs that Canadian oil production, already at 335,000 bpd, could start to rise as investment in its shale sector picks up. Canada’s overall crude production currently stands at 4.2 million bpd.

U.S. bank JP Morgan said it had increased its 2018 average price forecast by $10 per barrel to $70 per barrel for Brent and by $10.70 per barrel for WTI to $65.63.

“We expect Brent to touch close to $78 per barrel towards end of Q1 2018 or early Q2 2018,” it added.

— CNBC’s Tom DiChristopher contributed to this report.

U.S. opposes the planned Nord Stream

U.S.’s Tillerson says Nord Stream 2 pipeline would undermine Europe’s energy security

WARSAW (Reuters) – The United States opposes the planned Nord Stream 2 natural gas pipeline that would connect Russia and Germany, believing it would undermine Europe’s energy security, U.S. Secretary of State Rex Tillerson said on Saturday.

U.S. Secretary of State Rex Tillerson speaks at the Warsaw Ghetto monument in Warsaw, Poland January 27, 2018. 

“Like Poland, the United States opposes the Nord Stream 2 pipeline. We see it as undermining Europe’s overall energy security and stability,” he said at a press conference in Warsaw.

Oil boosted by dollar weakness, but headwinds loom

CNBC

  • The U.S. dollar fell to 2014 lows this week.
  • A weaker dollar supported general fuel demand.
  • But demand outlook weakened ahead of refinery maintenance season.

An oil pump jack in the oil town of Gonzales, Texas.

Getty Images
An oil pump jack in the oil town of Gonzales, Texas.

The oil rally paused for breath on Friday after hitting fresh three-year highs in the previous session, but weakness in the dollar continued to underpin prices.

Brent crude futures stood at $70.49 per barrel at 1047 GMT, 7 cents above their last close. On Thursday, the contract climbed to as high as $71.28 per barrel, its highest since 2014.

U.S. West Texas Intermediate (WTI) crude futures were at $65.66 a barrel, up 15 cents from their previous close, recovering from a session-low of $64.91 a barrel. On Thursday, they also reached their highest since December 2014, at $66.66 per barrel.

Both contracts were set for weekly gains after support from a weakening dollar, which on Friday hit new three-year lows against a basket of other leading currencies.

“For as long as the U.S. dollar remains on the defensive, no more pronounced price fall on the oil market is likely to ensue,” Commerzbank analyst Carsten Fritsch said in a note.

As oil is traded in dollars, swings in the greenback can impact oil demand as they affect the price of fuel purchases for countries using other currencies. Still, crude prices were capped by seasonally weakening demand.

Georgi Slavov, head of research at commodities brokerage Marex Spectron, said despite a generally healthy outlook, there were short-term oil demand headwinds due to the coming end of winter in the northern hemisphere.

Low oil prices have generated high oil demand, says Total CEO  

Many refiners shut down after winter for maintenance, resulting in lower orders for crude, their most important feedstock.

“Demand is starting to weaken as … refining capacity was taken out of the market,” Slavov said.

This is reflecting in oil inventories. U.S. bank Morgan Stanley noted that global oil stocks built up overall in the week ending Jan. 19.

On the supply side, U.S. oil production is expected to hit 10 million bpd soon, putting it on a par with top exporter Saudi Arabia.

Output has grown by more than 17 percent since mid-2016. Only Russia produces more, averaging 10.98 million bpd in 2017.

Rising U.S. output threatens to undermine the supply restraint led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia, aimed at propping up prices.

The cuts, coupled with demand growth, have contributed to a near 60 percent rise in oil prices since mid-2017 as excess crude inventories have been drawn down.

Brent oil hits $71 for 1st time since 2014 as dollar drops, US stocks decline

CNBC

  • Brent oil prices hit $71 per barrel on Thursday for the first time since 2014
  • Prices were pushed higher after U.S. crude inventories posted a 10th straight week of declines
  • Price support has also been coming from supply restrictions led by a group of producers around OPEC and Russia

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Nick Oxford | Reuters
A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Brent oil prices hit $71 per barrel on Thursday for the first time since 2014 as the dollar continued to weaken and crude inventories in the United States fell for a 10th straight week amid ongoing supply cutbacks by OPEC and top producer Russia.

Brent crude futures, the international benchmark for oil prices, hit a session high of $71.05 per barrel – the highest since early December 2014 – before dipping back to $70.99 by 0440 GMT. That was still up 46 cents, or 0.7 percent from the last close.

U.S. West Texas Intermediate (WTI) crude futures climbed to $66.35 per barrel, also the highest level since early December 2014, before dipping to $66.26. That was still up 1 percent from the last settlement.

Both crude benchmarks have risen by almost 60 percent since the middle of last year.

Price have been supported by supply restrictions led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia, the world’s biggest oil producer, which started last year and are set to last throughout 2018.

“That (the producer cuts), the U.S.-dollar fall, along with another inventory draw combined to drive (crude) up,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

U.S. crude inventories fell 1.1 million barrels in the week to Jan. 19, to 411.58 million barrels, the Energy Information Administration (EIA) said on Wednesday.

That is the lowest seasonal level since 2015 and below the five-year averageof about 420 million barrels.

Oil hits 3-year high

Oil hits three-year high  

In foreign exchange markets, the U.S. dollar hit its lowest level since December 2014 against a basket of other leading currencies.

A weakening dollar often results in financial traders taking investments out of currency markets and into commodity futures like crude.

Oil fuels inflation

Fereidun Fesheraki, chairman of consultancy FACTS Global Energy, told Reuters in Tokyo on Thursday that oil prices could rise further still.

“The market is so tight… The problem with this environment is that if you have something in say, Libya, and production goes down by 500,000 barrels (per day)… it (Brent) can easily go to $75 by May,” he said.

Analysts said that rising oil prices would likely start to have an inflationary effect.

“Higher oil prices will eventually be reflected in higher consumer prices as the costs of transport of most goods will rise,” said William O’Loughlin, investment analyst at Australia’s Rivkin Securities.

Looming over the generally bullish oil market has been U.S. oil production,which is edging ever more closely towards 10 million barrels per day (bpd), rising to 9.88 million bpd last week.

U.S. output has grown by more than 17 percent since mid-2016, and is now on par with that of top exporter Saudi Arabia.

Only Russia produces more, averaging 10.98 million bpd in 2017.

Oil dips on higher US fuel stocks, but overall market remains supported

CNBC

  • Oil prices fell on Wednesday, weighed down by data that showed an increase in U.S. crude oil and gasoline inventories

Getty Images

Oil prices fell on Wednesday, weighed down by data that showed an increase in U.S. crude oil and gasoline inventories.

Brent crude oil futures were at $69.83 a barrel at 0444 GMT, down 13 cents from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $64.43 a barrel, down 4 cents from their last settlement.

Traders said prices had been pressured by U.S. data showing an increase in crude and gasoline stocks.

The American Petroleum Institute said on Tuesday that crude inventories rose by 4.8 million barrels in the week to Jan. 19 to 416.2 million, after nine weeks of drawdowns.

Gasoline stocks climbed by 4.1 million barrels, while refinery crude runs fell by 420,000 barrels per day.

In Asia, oversupply of gasoline has pulled down refinery profits for the product to their lowest level since 2015.

Amid these weakening indicators, traders are taking measures to protect themselves from a potential fall in crude prices.

Trading data shows open interest for Brent put options to sell at $70, $69 and $68 per barrel has surged since the middle of last week on the Intercontinental Exchange (ICE).

Charts show oil prices could soon peak

Charts show oil prices could soon peak  

“The options market shows increased demand for downside protection. This makes sense considering how one-sided (to the upside) the speculative bets have become,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Overall, there is now far more demand for options to sell Brent than there is for call options, which are the right to buy Brent at a certain price.

Sukrit Vijayakar, director of energy consultancy Trifecta, said the rising options to sell were a result of huge amounts of long positions that have been built up in the market over the past months of rising crude prices.

“We still have…nine long barrels for every short barrel, so a reversal should be interesting to watch,” he said.

Still strong support

Despite this, traders said oil prices were unlikely to tumble far as markets remain supported by healthy economic growth, as well as from supply restrictions led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia.

In the latest sign of robust global economic growth, Japanese manufacturing activity expanded at the fastest pace in almost four years in January, a survey showed on Wednesday.

Economic growth is translating into healthy oil demand growth, which comes at a time that OPEC and Russia lead production cuts aimed at tightening the market and propping up prices. The deal to withhold output started in January last year and is currently set to last through 2018.

Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore said a “beaming economic forecast along with stout compliance from OPEC (to withhold production) is providing convincing support.”

Russia has ‘learned its lesson’ about oil price volatility, wealth fund chief says                      

CNBC

  • Speaking from the World Economic Forum in Davos, RDIF CEO Kirill Dmitriev emphasized the importance of diversification in the Russian economy
  • RDIF is the $10 billion sovereign wealth fund created by Russia’s government to co-invest in the Russian economy alongside other countries
Kirill Dmitriev, CEO of the Russian Direct Investment Fund at the APEC CEO forum in Beijing, China, on Nov. 10, 2014.

Tomohiro Ohsumi | Bloomberg | Getty Images
Kirill Dmitriev, CEO of the Russian Direct Investment Fund at the APEC CEO forum in Beijing, China, on Nov. 10, 2014.

Russia has “learned its lesson” about oil price volatility, the chief executive of the Russian Direct Investment Fund (RDIF) told CNBC Tuesday.

Speaking from the World Economic Forum in Davos, RDIF CEO Kirill Dmitriev emphasized the importance of diversification in the Russian economy.

“For the Russian economy we continue to focus on diversification. We expect technology to make up 25 percent of our portfolio,” Dmitriev said. “Infrastructure and tech still need to be important and I think Russia learned its lesson about oil price volatility, so diversification and investment in those areas is very key.”

RDIF is the $10 billion sovereign wealth fund created by Russia’s government to co-invest in the Russian economy alongside other countries. Dmitriev was made chief of the fund in 2011 to improve foreign investment flows and investor confidence in the country.

The head of the Kremlin’s investment vehicle was positive about the country’s growth forecast, despite the pressure of U.S. sanctions issued in both 2014 and 2016 over Russia’s annexation of Crimea peninsula and alleged Russian interference in the latest U.S. election.

“Russia saw major increases of FDI (foreign direct investment) last year of 25 percent, which is one of the highest levels of FDI in (our) history, and it’s related to Russia resuming growth,” Dmitriev said. “We had almost 2 percent GDP growth last year, we’ll have more than 2 percent next year.”

The World Bank reported Russia’s 2017 GDP growth at 1.7 percent for 2017, and forecasts the same for 2018.

Russia has learnt its lesson about oil price volatility: RDIF CEO

Russia has learned its lesson about oil price volatility: RDIF CEO  

‘Russian economy is feeling quite strong right now’

“Oil prices are stable, our stock market is at one of its peak levels,” he continued. “Obviously there are some political challenges, some uncertainty, but there is no question the Russian economy is feeling quite strong right now.”

The multibillion dollar fund has been under U.S. government sanctions since 2015 because of ties to its parent, Russian bank Vnesheconombank (VEB), which has been dubbed the “bank of spies” by members of the U.S. intelligence community. VEB is also under U.S. sanctions, according to the U.S. Treasury Department.

In 2016, RDIF was able to transfer its management company away to another Russian entity in order to distance itself from VEB and reassure investors of its independence. The fund has emphasized that joint projects, not sanctions, should be investors’ focus.

Attracting foreign investment is a major priority for the Russian government. Russia’s economy plunged into recession between 2014 and 2017, when both the imposition of U.S. sanctions and a nearly 50 percent drop in global oil prices caused the ruble to collapse.

Financial bodies observed a moderate recovery for the Russian Federation at the end of 2017 thanks to higher commodity prices, strengthening global demand and lower interest rates.

Oil price rally will not persuade OPEC to end production cuts, analyst says

CNBC

  • Crude futures have climbed to highs not seen since the early days of a slump in December 2014, prompting some analysts to suggest the recent price rally could hasten the process of OPEC devising an exit strategy
  • “We will see compliance drop in the second half of the year (so) they are going to want to really cement the gains they have made and the rebalancing they have achieved,” Richard Mallinson, geopolitical analyst at Energy Aspects, told CNBC on Friday
  • In recent weeks, big investment banks have raised their target price for oil as crude futures have risen to multi-year highs

Nervousness about what oil ministers say

Market views future of OPEC deal as a binary: Energy Aspects  

The recent uptick in oil prices is not likely to be enough to persuade OPEC to end production cuts this summer, Richard Mallinson, geopolitical analyst at Energy Aspects, told CNBC on Friday.

Crude futures have climbed to highs not seen since the early days of a slump in December 2014, prompting some analysts to suggest the recent price rally could hasten the process of OPEC devising an exit strategy. Brent crude futures hit a peak of $70.37 a barrel on Monday, with the global benchmark since paring some of its recent gains to trade at $68.90 on Friday afternoon.

However, when asked at what stage oil traders could expect OPEC to begin phasing out the current level of production cuts, Mallinson said the major oil producing group would need to wait until the middle of 2018 before it could “confidently” feel the market had leveled out.

Nonetheless, he did not expect the 14-member cartel to end its deal with 10 other allied producers in June.

“We will see compliance drop in the second half of the year (so) they are going to want to really cement the gains they have made and the rebalancing they have achieved,” he added.

Big banks raise oil price targets

In recent weeks, big investment banks have raised their target price for oil as crude futures have risen to multi-year highs.

Bank of America Merrill Lynch and Morgan Stanley both upped their forecasts for crude prices this week, while Goldman Sachs said the risks of prices overshooting its current targets are mounting.

Pumpjacks in an oil field.

Paul Giamou | Aurora | Getty Images
Pumpjacks in an oil field.

The main price driver has been a supply cut from OPEC and Russia, who started to withhold output in January last year. The OPEC-led production cuts, that are scheduled to last throughout 2018, are aimed at clearing a supply overhang and propping up prices.

OPEC is next scheduled to meet in Vienna, Austria, on June 22.

Mallinson said that while it was understandable for oil traders to be wary of the group’s summer meeting, he emphasized they would be mistaken in thinking the major oil producing group’s only options were to either stick with the current level of supply cuts or to allow flat-out global production.

The price of oil collapsed from near $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. OPEC’s reluctance to cut output was also seen as a key reason behind the fall. But, the oil cartel soon moved to curb production — along with other oil-producing nations — in late 2016.

— CNBC’s Tom DiChristoper contributed to this report.