Oil slips as traders eye supply cut easing at OPEC meeting

CNBC

Reuters
KEY POINTS
  • Brent crude fell 27 cents to $42.97 a barrel by 0114 GMT.
  • U.S. West Texas Intermediate crude was at $40.27 a barrel, down 28 cents.
  • Oil was little changed last week as a resurgence of coronavirus cases prompted several U.S. states to impose tighter travel restrictions that could dampen oil demand recovery at the world’s largest consumer.
An aerial view of oil tankers anchored near the ports of Long Beach and Los Angeles amid the coronavirus pandemic on April 28, 2020 off the coast of Long Beach, California.
An aerial view of oil tankers anchored near the ports of Long Beach and Los Angeles amid the coronavirus pandemic on April 28, 2020 off the coast of Long Beach, California.
Mario Tama | Getty Images

Oil slipped in early Asian trade on Monday as traders eyed an OPEC technical meeting this week which is expected to recommend an easing in supply cuts that have been propping up crude prices.

Brent crude fell 27 cents to $42.97 a barrel by 0114 GMT while U.S. West Texas Intermediate crude was at $40.27 a barrel, down 28 cents.

Oil was little changed last week as a resurgence of coronavirus cases prompted several U.S. states to impose tighter travel restrictions that could dampen oil demand recovery at the world’s largest consumer.

However, prices rose more than 2% on Friday after an upward revision by the International Energy Agency in its 2020 oil demand by 400,000 barrels per day.

Oil prices have recovered sharply from multi-decade lows in April after the Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, cut output by a record 9.7 million barrels per day for three months since May.

OPEC’s Joint Ministerial Monitoring Committee (JMMC) will meet on Tuesday and Wednesday to recommend the next level of cuts.

OPEC and Russia were expected to ease their supply cuts as global oil demand has recovered and prices have bounced back.

“The planned easing of OPEC+ production cuts next month … and a potential rebound in U.S. production could add pressure on the supply side of the equation,” Stephen Innes, chief global markets strategist at AxiCorp said in a note.

Libya exported its first crude cargo in six months on Friday after a blockade by eastern forces, but then re-imposed force majeure on all oil exports on Sunday.

Its National Oil Corp accused the United Arab Emirates of instructing the eastern forces in Libya’s civil war to reimpose the blockade.

Oil drops as new coronavirus outbreaks raise fuel demand concerns

CNBC

Reuters
KEY POINTS
  • Brent crude futures fell 89 cents, or 2.3%, to $37.84 a barrel by 0302 GMT, while U.S. West Texas Intermediate crude futures were down $1.18, or 3.3%, to $35.08 a barrel.
  • The oil benchmarks fell about 8% last week, their first weekly declines since April.
An aerial view shows pumpjacks in the South Belridge Oil Field on April 24, 2020 near McKittrick, California.
An aerial view shows pumpjacks in the South Belridge Oil Field on April 24, 2020 near McKittrick, California.
David McNew | Getty Images

Oil fell more than 2% on Monday, extending losses from last week, as new coronavirus infections hit China and the United States, raising the prospect that renewed outbreaks of the virus could weigh on the recovery of fuel demand.

Brent crude futures fell 89 cents, or 2.3%, to $37.84 a barrel by 0302 GMT, while U.S. West Texas Intermediate crude futures were down $1.18, or 3.3%, to $35.08 a barrel.

A cluster of infections in Beijing has increased concern of a resurgence of the disease. The coronavirus pandemic started at the end of last year in the Chinese city of Wuhan.

The oil benchmarks fell about 8% last week, their first weekly declines since April, as U.S. coronavirus cases started increasing. Over the weekend, more than 25,000 new U.S. cases were reported on Saturday alone as more states reported record new infections and hospitalizations.

“The recovery in oil demand is already set to be a lengthy process, and a fresh wave of cases will certainly raise worries that a recovery in demand may take even longer than initially thought,” ING Economics said in a note.

Industrial output in China, the world’s biggest crude oil importer, rose for a second consecutive month in May but the rise was smaller than expected, suggesting the world’s second-biggest economy is struggling to get back on track after containing the coronavirus.

The country’s refineries increased their throughput in May by 8.2% more than the same period a year ago to about 13.6 million barrels per day (bpd), government data showed.

An OPEC-led monitoring panel will meet on Thursday to discuss ongoing record production cuts and see whether countries have delivered their share of the reductions, but will not make any decision, according to five OPEC+ sources.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, have been reducing supplies by 9.7 million bpd, about 10% of pre-pandemic demand, and agreed in early June to extend the cuts for a month until end-July.

Iraq, one of the laggards in complying with the curbs, agreed with its major oil companies to cut crude production further in June, Iraqi officials working at the fields told Reuters on Sunday.

The country’s oil minister later said it would export an average of 2.8 million bpd in June.

Oil prices inch higher, 1-month supply cut extension falls short of market hopes

CNBC

Reuters
KEY POINTS
  • Brent crude had climbed as high as $43.41 a barrel but by 0239 GMT was trading up just 21 cents, or 0.5%, at $42.51.
  • U.S. West Texas Intermediate (WTI) crude rose 2 cents, or 0.05%, to $39.57 a barrel, after earlier touching $40.44 earlier.
An offshore oil platform is seen with a tanker in the distance on April 20, 2020 in Huntington Beach, California.
An offshore oil platform is seen with a tanker in the distance on April 20, 2020 in Huntington Beach, California.
Michael Heiman | Getty Images

Oil crept higher on Monday, but gave up big early gains as optimism over major crude producers’ deal to extend record output cuts gave way to disappointment that the accord didn’t extend beyond the end of July.

Brent crude had climbed as high as $43.41 a barrel but by 0239 GMT was trading up just 21 cents, or 0.5%, at $42.51. U.S. West Texas Intermediate (WTI) crude rose 2 cents, or 0.05%, to $39.57 a barrel, after earlier touching $40.44 earlier. Both hit their highest since March 6.

Since the start of April Brent has nearly doubled, propped up by the unprecedented production cut of 9.7 million barrels per day — nearly 10% of global supplies — agreed in April by the Organization of the Petroleum Exporting Countries (OPEC), Russia and other allies, collectively known as OPEC+.

On Saturday OPEC+ agreed to extend the deal by a third month through end-July. Following the deal, world’s top exporter Saudi Arabia sharply raised its monthly crude prices for July.

But Howie Lee, economist at Singapore bank OCBC, said the one-month extension had fallen short of market hopes for a three-month deal. He said both benchmarks would require stronger bullish factors to propel prices back to where they were before March 6, when prices crashed after OPEC and Russia initially failed to reach an agreement to extend output cuts into April.

“It’s a big gap there. You need a strong conviction to go from $43 to pre-crash levels,” Lee said, referring to Brent being above $50 a barrel before the March crash.

Still, the current deal is expected to lead the market into a supply deficit by October, underpinning prices in the longer run, he added.

Compliance with the agreement among OPEC members such as Iraq and Nigeria also remains an issue.

“While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

“The potential return of Libyan output could also cause considerable challenges for the OPEC leadership.”

In southwestern Libya, two major oilfields have reopened after months of a blockade that shut off most of the country’s production.

Even as oil prices recovered, they are still well below the costs of most U.S. shale producers, leading to shutdowns, layoffs and cost-cutting in the world’s largest producer.

The number of operating U.S. oil and natural gas rigs fell to a record low for a fifth week in a row in the week to June 5, according to data from Baker Hughes.

Nearly 30% of U.S. offshore oil output was also shut on Friday as tropical storm Cristobal entered the Gulf of Mexico.

Higher oil prices could invite the reinstatement of supply, notably U.S. shale, that was planned to be shut-in in June and July, BNP Paribas’ Harry Tchilingurian said.

“OPEC+ faces a catch-22 situation,” he said. “The resumption of output … may moderate the pace of rebalancing of the oil market.”

Brent oil rises to $40 amid hopes for output cuts, recovery

CNBC

Reuters
KEY POINTS
  • Brent crude futures for August rose 43 cents, or 1.1%, at $40 a barrel, by 0252 GMT. The contract climbed to as high as $40.42, the highest since March 6, after gaining 3.3% on Tuesday.
  • U.S. West Texas Intermediate (WTI) crude futures gained 68 cents, or 1.9%, at $37.49 a barrel. It rose to as much as $37.88, also the highest since March 6. The contract ended the previous session up 3.9%.
An offshore oil platform is seen with a tanker in the distance on April 20, 2020 in Huntington Beach, California.
An offshore oil platform is seen with a tanker in the distance on April 20, 2020 in Huntington Beach, California.
Michael Heiman | Getty Images

Oil rose on Wednesday, with Brent at $40 for the first time since March, as optimism mounted that major producers will extend production cuts and a recovery from the coronavirus pandemic will spur fuel demand.

Brent crude futures for August rose 43 cents, or 1.1%, at $40 a barrel, by 0252 GMT. The contract climbed to as high as $40.42, the highest since March 6, after gaining 3.3% on Tuesday.

U.S. West Texas Intermediate (WTI) crude futures gained 68 cents, or 1.9%, at $37.49 a barrel. It rose to as much as $37.88, also the highest since March 6. The contract ended the previous session up 3.9%.

Both benchmarks have risen sharply in recent weeks from the lows of April, buoyed by a continuing recovery in China, the epicenter of the virus outbreak, while other economies are slowly opening up after lockdowns to contain its spread.

The Organization of the Petroleum Exporting Countries (OPEC) and other major producers including Russia, a group known as OPEC+, may extend production cuts of 9.7 million barrels per day (bpd), or about 10% of global output, into July or August, sources told Reuters.

The cuts are currently due to run through May and June, scaling back to a reduction of 7.7 million bpd from July to December, but Saudi Arabia has been pushing to keep the deeper cuts in place for longer.

“Even deeper cuts will speed up the process of rebalancing the market,” ING Economics said, noting the “market was already set to transition from surplus to deficit as we move into the second half of this year.”

With the date of the meeting not yet set and some calling for it to be early as this week, much remains up in the air, however.

But the demand picture is looking brighter as economies including China, the world’s second-biggest oil consumer, start to recover from the pandemic.

“As virus-related lockdown measures continue to be lifted, we expect that demand will gradually recover,” Capital Economics said in a note, estimating that global oil consumption will fall to just under 92 million bpd on average in 2020.

This compared with 100.2 million bpd in 2019, it said, before the pandemic swept through Europe and the United States, evaporating demand for everything from flying to trips to the dentist.

U.S. crude oil inventories fell by 483,000 barrels in the week to May 29, the American Petroleum Institute said on Tuesday. Gasoline and distillate fuel stockpiles rose.

Official government inventory data will be released later on Wednesday.

Those figures still show U.S. stockpiles remain high and are forecast to have risen for a second week in a row.

Saudi Arabia’s big oil gamble will hurt the kingdom — but it’ll likely pay off

KEY POINTS
  • Oil at $20 per barrel was unimaginable a few months ago; now some forecasters are calling prices as low as $10 or even single digits as the world runs out of storage space and the global economy grinds to a halt.
  • But when the dust settles, many analysts believe it’ll be Saudi Arabia — even with its overwhelming reliance on oil revenue — that comes out on top.
  • The International Energy Agency expects global oil demand to contract by a stunning 20% this year, and Japanese bank MUFG estimates demand in April to plummet by 8.5 million barrels per day.
GP: Saudi Aramco oil processing facility in Saudi Arabia 200310 EU
A worker at an oil processing facility of Saudi Aramco, a Saudi Arabian state-owned oil and gas company, at the Abqaiq oil field.
Stanislav Krasilnikov | TASS | Getty Images

April is going to be a hellish month for the oil industry.

Already down more than 65% year-to-date, crushed by the coronavirus crisis and the Saudi-Russia oil price war, crude prices are set to tank even further when Saudi Arabia and others turn on the taps following the expiration of the OPEC+ output cut deal on April 1 that had reined in production to boost the market.

Oil at $20 per barrel was unimaginable a few months ago; now some forecasters are calling prices as low as $10 or even single digits as the world runs out of storage space and the global economy grinds to a halt.

But when the dust settles, many analysts believe it’ll be Saudi Arabia — even with its overwhelming reliance on oil revenue — that comes out on top.

The kingdom is willingly inflicting pain upon itself by slashing its selling prices and committing to increase production to more than 12 million barrels per day — a record amount — after a bid to cut output together with Russia failed. Its strategy now is going after maximum market share.

Despite the dire numbers, however, enduring months of fiscal pain while it pursues greater exports may ultimately pay off.

“Saudi will definitely be one of the winners on the other side,” Abhi Rajendran, director of research at Energy Intelligence, told CNBC. His call is based on the assumption that oil prices will rebound in 2021 post-coronavirus; his firm sees oil back up to $80 per barrel within three years.

Rajendran predicts Saudi Arabia’s market share will “definitely grow,” adding that “in a year or two they will have to increase production because the market will need it… and it will be ahead of the U.S. again in terms of volume.”

‘Short-term pain for long-term gain’

Still, many analysts expect production to drop after April when it becomes clear that the demand for all that crude just isn’t there.

Stephen Brennock of PVM Oil Associates described the Saudi policy as one of “short-term pain for long-term gain.”

“Like all oil producers, they will not be thrilled by the prospect of $30 oil for the foreseeable future… However, the ramp up in output and shipments will safeguard its long-term position in several key export markets,” Brennock said.

“I would not be surprised, at all, to see the oil market return to a tight supply environment in as soon as two years’ time,” John Kilduff, founding partner of advisory firm Again Capital, told CNBC.

… But the buyers could disappear

Still, with demand eviscerated by a world in lockdown fighting the spread of the coronavirus, the Saudis could fail to find enough buyers.

“If evidence reveals that Saudi Arabia can’t move all of that oil due to demand destruction from the coronavirus shutdowns then it could look very bad for the kingdom,” said Ellen Wald, president of Transversal Consulting and author of “Saudi, Inc.”

saudi crude production S&P snip 1.1585807293696

Indeed, the full economic blow of the global lockdowns hasn’t registered yet. Analysts at Dubai-based bank Emirates NBD warned that it will kick in “this quarter with the level of demand destruction likely to permanently alter the long-term trajectory for oil consumption.”

The International Energy Agency expects global oil demand to contract by a stunning 20% this year, and Japanese bank MUFG estimates demand in April to plummet by 8.5 million barrels per day.

Austerity for the kingdom?

China will likely be a top buyer for the cheap Saudi crude, but that may not be enough to make up for the demand drop from other major markets India and Europe. Plus, China getting discounted rates in April doesn’t guarantee they will keep buying from the Saudis in the future, Wald pointed out. “Unless Saudi gets someone to sign a long term contract, they haven’t ‘captured’ the market share,” she added.

The kingdom’s next moves to counter the oil revenue drop could include further borrowing, selling assets from its Public Investment Fund, accessing foreign cash reserves or even imposing austerity measures.

That could have wide-ranging consequences domestically, Wald believes. “There will very, very likely be more political repression because that will have to come with the hard choices.”