US benchmark gains more ground after rising in the previous session
US crude edged higher for a second day on Tuesday, underpinned by high compliance with Opec's production cuts even as the market remains anchored by rising US production.
Opec has so far surprised the market by showing record compliance with oil-output curbs, and could improve in coming months as the biggest laggards - the United Arab Emirates and Iraq - pledge to catch up quickly with their targets.
"With the prospect of Opec extending the current cuts even longer, we would expect to see prices continue to push higher from here," ANZ said in a note.
West Texas Intermediate crude oil added 11 cents, or 0.2%, to $54.16 a barrel early on Tuesday, while benchmark Brent crude oil added 17 cents, or 0.3%, to $56.10 a barrel.
For the month, US crude is up 2.6% after falling in January, while Brent oil has risen marginally.
Under the deal, Opec agreed to curb output by about 1.2 million barrels per day from 1 January, the first cut in eight years. Russia and 10 other non-Opec producers agreed to cut around half as much.
A Reuters survey of Opec production later this week will show compliance for February.
Passive investment funds are poised to shift an estimated $2 billion from far-term to near-term crude futures over the next week, anticipating an energy market rally as the Opec output cut slashes supply.
At the same time rising US oil production continues to limit gains.
"Talking about more Opec cuts, they can't have too much higher cuts as it will lead to more US shale oil coming into the market," said Jonathan Barratt, chief investment officer at Sydney's Ayers Alliance.
US producers boosted crude production to over 9 million bpd during the week ended 17 February for the first time since April 2016 as energy firms search for more oil, according to federal data.
US drillers added five oil rigs in the week to 24 February, bringing the total count up to 602, the most since October 2015, energy services firm Baker Hughes said on Friday.
A bearish target at $53.37 per barrel has been aborted for US oil, as it seems to have stabilised around a support at $53.99, said Wang Tao, Reuters market analyst for commodities and energy technicals.
Brent oil looks neutral in a range of $55.93-$57.26 per barrel, and an escape could suggest a direction.
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Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions