U.S. Oil Poised for Weekly Loss as Record Output Weighs on Price
Comment of the Day

June 01 2018

Commentary by Eoin Treacy

U.S. Oil Poised for Weekly Loss as Record Output Weighs on Price

This article by Tsuyoshi Inajima for Bloomberg may be of interest to subscribers. Here is a section:

While hedge funds invested in U.S. oil are betting pipeline bottlenecks will make Texas crude even cheaper, trading giants are seeing an opportunity to export millions of barrels as shale output continues to surge. For now, American price moves have favored the financial players. Meanwhile, Brent climbed last month following President Donald Trump’s decision to reimpose sanctions on Iran, and as Venezuelan output plunged amid an economic crisis.

Also at the forefront of investors’ minds is OPEC and the allies’ next step on output cuts. Saudi Arabia and Russia said last week that they are considering boosting production to ease potential supply disruptions in Iran and Venezuela after a global surplus was eliminated. Most producers weren’t consulted about the proposal, and officials from several producers said they disapproved of raising output.

Eoin Treacy's view

The spread between West Texas Intermediate and Brent Crude is currently at $8.50 which is beginning to make headlines but the gap between the two benchmarks has been rising steadily for the last couple of years and broke out this week. The difference has been as high as $12 and even $16 as recently at 2014 so the argument for boosting exports is likely to be a hot topic of conversation in the USA.

If we cast our minds back to 2014 it was surging US output that contributed to the breakdown from the three-year range above $100 on Brent Crude. With the prospect of US barrels competing for market share globally, the incentive for Saudi Arabia and Russia to increase supply, in an attempt to contain the threat, is growing increasingly strong.

Brent crude’s reaction to date has been a little more than $5 so it is somewhat larger that recent pauses but not convincingly so. The most likely scenario is that crude oil prices are now in a process of mean reversion.

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