Oil drops after Saudis tell OPEC they reversed some output cuts

Oil prices have been trading in a narrow $5 range around the low-to-mid-$50s over the past three months as sentiment in oil markets has been torn between rising stockpiles and increased shale production in the USA and hopes that oversupply may be curbed by output cuts announced by major global producers.

So it is possible for OPEC to agree to collectively cut a million barrels a day of production (which would be about 2.6% of the group’s 2015 production), but virtually impossible (and in fact illegal) for US producers to collude in the same fashion.

The price drop-off was precipitated by the substantial rise in US crude inventories, which the Energy Information Agency (EIA) said increased 8.21 MMbbl during the previous week.

At the close of Friday’s formal trading session on the NYMEX, West Texas Intermediate (WTI) crude oil was down nine percent ($4.84) to settle at $48.49 per barrel.

The oil price recovery was, however, under threat from fresh supply as high-cost producers in the United States started drilling again, encouraged by the price upswing, as well as from rising Canadian production.

Brent crude fell 6 cents to $51.31 a barrel by 1:30 p.m.

Russia’s top oil major Rosneft warned that a recovery in US oil output may deter OPEC and non-OPEC producers from extending production cuts beyond June and might lead to a new price war.

“With the market still digesting the big increase in inventories, oil prices are likely to remain under pressure today”, ANZ bank said in a note.

However, while production from the Middle East has ebbed, US oil producers are increasing their production.

“The main goal of OPEC’s production cut plan is not just to push prices up, but to reduce the global inventories”. He said shale producers “should not automatically assume OPEC will extend the cuts”. That figure, submitted by Riyadh, jarred with OPEC’s own estimates, which showed Saudi production falling further last month to 9.8 million barrels a day.

With the Americans increasingly being viewed as the sole heavies of an initiative that despite reports of 98 percent compliance has seen substantial output increases from the likes of Iran and Iraq, Kuwait has become the first OPEC nation to official call for an extended reduction agreement.

Even after the increase, Saudi Arabia’s data shows it’s cutting output more than required under the terms of OPEC’s November 30 agreement.

“However, the key to market performance this week is the response to the US lift in rates”, McCarthy added.