Oil gains more than 1% on Middle East schism, tightening supply

Alicia Cross
June 9, 2017

Oil markets were subdued today, with Brent struggling to maintain US$50 (RM214) per barrel as efforts led by Opec to tighten the market were undermined by persistently rising U.S. production.

Global benchmark Brent crude futures was down 1.7 percent, or 80 cents, at $49.75 a barrel, as of 0725 GMT.

US West Texas Intermediate futures were at US$47.69 a barrel, weighed down by ongoing climbs in US production.

Both contracts were on track for weekly losses of at least 4 per cent.

President Donald Trump's controversial decision to withdraw from the 2015 Paris climate agreement on Thursday sparked additional concerns that US oil production could expand rapidly in the absence of a stringent focus on curbing the use of fossil fuels.

"This could lead to a drilling free-for-all in the U.S. and also see other signatories waver in their commitments", said Jeffrey Halley, senior market analyst at futures brokerage OANDA.

"Investors continue to doubt the ability of OPEC to rebalance the oil market, with crude oil prices remaining under pressure amid further signs of rising USA oil production", ANZ bank said on Monday.

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Although a sharp fall of USA crude inventories could be seen as a supportive factor to oil prices, US crude production rose to 9.35 million bpd last week, up almost 500,000 bpd from a year ago.

Oil slid last week after the agreement by the Organization of Petroleum Exporting Countries and its allies to prolong output curbs for nine months disappointed some investors hoping for more.

Crude futures kicked off the week with slight gains, though downward pressure remains as many investors remain unconvinced that production cuts by Middle Eastern and Russian Federation producers are sufficient to offset accelerating output in the USA and Africa.

"The lack of moderation in USA production is undercutting OPEC efforts to manage the market", said Michael McCarthy, a chief strategist at CMC Markets in Sydney.

Rising output from OPEC members Nigeria and Libya, which are exempt from the output reduction deal, is also undercutting attempts to limit production.

Faced with lingering glut woes, the oil cartel also discussed last week reducing output by a further 1 to 1.5 percent, and could revisit the proposal should inventories remain high, according to sources. The US Energy Information Administration just released their latest official data for March at 9.1 million barrels per day.

Those increases in inventories may nonetheless prove substantial enough to prevent prices gaining, said David Martin, an analyst at JPMorgan, who slashed his 2018 forecast for Brent crude by $10 a barrel to $45 on May 25. It is not investment advice or a solution to buy or sell securities. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns.

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