Singapore: Oil prices reversed earlier gains on Friday and fell as surging US output as well as signs of weakening demand in China weighed on markets, even though supply woes in Venezuela and the Organization of Petroleum Exporting Countries’ (Opec) ongoing production cuts offered crude some support.
After gaining some ground early in the session, Brent crude futures, the international benchmark for oil prices, were at $77.06 per barrel at 11.21am, down 26 cents, or 0.3% from their last close. US West Texas Intermediate (WTI) crude futures were down 18 cents, or 0.3%, at $65.77 a barrel.
China’s May crude oil imports eased away from a record high hit the month before, customs data showed on Friday, with state-run refineries entering planned maintenance. May shipments were 39.05 million tonnes, or 9.2 million barrels per day (bpd), according to the General Administration of Customs. That compared with 9.6 million bpd in April.
Further weighing on prices has been surging US output, which hit another record last week at 10.8 million bpd. That’s a 28% gain in two years, or an average 2.3% growth rate per month since mid-2016. It puts the US close to becoming the world’s biggest crude oil producer, edging nearer to the 11 million bpd churned out by Russia.
The surge in US production has pulled down US WTI crude into a steep discount versus Brent to more than $11 per barrel, its steepest since 2015.
“This is occurring because of the rapid increase in production from US shale coupled with the tightening of supplies elsewhere through the actions of Opec and Russia,” said William O’Loughlin, investment analyst at Australia’s Rivkin Securities.
Market still tight
Despite Friday’s falls, Brent remains more than 15% above its level at the start of the year.
US investment bank Jefferies said on Friday that the “crude market is tight and spare capacity could dwindle to 2% of demand in 2H18, its lowest level since at least 1984”.
Markets have been tightened by supply trouble in Venezuela, where state-owned oil firm PDVSA is struggling to clear a backlog of around 24 million barrels of crude waiting to be shipped to customers.
More generally, Brent has been pushed up by voluntary production cuts led by the Middle East dominated producer cartel of Opec and by top producer Russia, which were put in place in 2017. The group and Russia are due to meet at its headquarters in Vienna on 22 June to discuss production policy.
“The June 22 Opec meeting will now likely become the most important factor influencing (the) crude price,” Jefferies said.