MarketsFarm — At the OPEC+ meeting Sunday in Vienna, Saudi Arabia announced it will cut its oil production by one million barrels per day (BPD) come July.
And while that move was bullish for the markets, by how much remains to be seen, said Phil Flynn of the Price Futures Group in Chicago.
“It’s probably put a floor under the price of oil,” Flynn commented. “The question is how high will it go?”
Reports said that in addition to the Saudi cut, the rest of the 23-member alliance would reduce its output by a net 400,000 BPD.
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To justify the cut, Saudi Arabia said there’s a looming supply glut in the global oil market that’s already contending with weaker prices.
Flynn said crude oil modestly increased but there were still issues, noting there continued to be tensions within OPEC and OPEC+.
As the week of June 5 started, prices for Brent Crude and West Texas Intermediate gained more than $1 per barrel. However, by mid-afternoon that Monday those gains faded to well below 50 cents per barrel (all figures US$).
Prices are “struggling because the Saudis made some comments…that they’re fed up with OPEC members who aren’t meeting their oil output goals,” Flynn explained, pointing to some of the cartel’s African members.
Also, Flynn said another report on Monday indicated Russian oil loadings at the country’s western ports hit a four-year high in May, as they produced as much as they could and sold it at a discount.
“The Saudis are calling for more transparency from the Russians as to how much oil they are producing,” he added, pointing to Russia previously promising its OPEC+ partners it would reduce its output.
As for Saudi Arabia, Flynn stated the kingdom believes it can push up oil prices and not hurt its share of the global market.
However, he said the current market has been nervous and pessimistic as to what could come down the road. Otherwise the oil market normally looks ahead to see what could transpire.
“They’re erring on the side that demand is going to fall off the map even though that hasn’t happened yet,” Flynn said, noting that supplies remain tight.
North American prices will climb upward again, he added, suggesting gasoline in the United States could reach $5 per gallon.
“But I think the market is going to need a little convincing in the days ahead as to whether the economy can stand this production cut and see if inventories really tighten,” Flynn said.
One wildcard he cited was Russia, as it likely wants to avoid a price war with Saudi Arabia.
“If they don’t keep the Saudis in their back pocket this turns into a price war, and neither one of these countries are going to win,” Flynn emphasized. “But the jury is still out as to whether the Russia can comply.”
It’s estimated OPEC+ is responsible for 40 per cent of the world’s crude oil. The alliance is comprised of the 13 members of the Organization of the Petroleum Exporting Countries and 10 additional members including Russia, Mexico and Kazakhstan.
— Glen Hallick reports for MarketsFarm from Winnipeg.
