Oil slumps as Saudi Arabia and Russian ministers signal output increase

Jermaine Castillo
May 31, 2018

The recent astronomical rise in oil prices has been driven by the fact that the current cuts are larger than 1.8 million barrels per day originally agreed by OPEC.

Oil markets hit something of a sweet spot earlier this year as prices bounced between $60 and $70 per barrel.

What is perhaps even more impressive is the spread between Brent (geopolitical risk premia) and WTI (domestic "over"-supply) is now well over $9 - the highest since March 2015..." The joints efforts managed to buoy the oil prices into interstellar prices.

In either case, markets have some time to digest the news.

He believes that oil price could remain "lower-for-longer".

Starting in mid-2014, the oil price experienced a long and deep downturn for about three and a half years. Should a "complete collapse" take place, Parker suggests that $100 a barrel wouldn't be out of the question.

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The OSPs, on the other hand, show exactly what the Saudis are doing in the oil market, and in some ways are a more important signal.

OPEC wants to world to know that it is in control and has the power to raise output just enough to replace supply lost to the turmoil in Venezuela and the sanctions on Iran. With the Organisation of Petroleum Exporting Countries and its partners said to have cleared a market surplus despite record American production, traders now are weighing whether Saudi Arabia and Russian Federation will implement their plan without finding a compromise with allies.

"It was always going to be a tricky announcement of when to ease production cuts", said Ole Sloth Hansen, head of commodities research at Saxo Bank A/S in Copenhagen.

"The pace of the recent rise in oil prices has sparked a debate among investors on whether this poses downside risks to global growth", Chetan Ahya, Chief Economist at US bank Morgan Stanley wrote over the weekend in a note. The oil and gas industry makes up 50 per cent of the country's gross domestic product.

In some ways the wild card for the oil markets now is the United States, which is becoming an increasingly important player in Asian markets. "There is, therefore, scope for an increase in OPEC output while still maintaining supply cuts for the remainder of the year", Tchilinguirian added.

Automobiles speed past an oil refinery as they travel down a major highway in Carson, California, U.S., May 23, 2018.

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It is normal to have short-term blips in oil prices, which are driven by fear rather than fundamentals, Slaughter said. The rise of U.S.

Meanwhile, surging USA crude production showed no sign of abating as drillers continued to expand their search for new oilfields to exploit.

Data from the Energy Information Administration shows US oil exports peaked at 2.6 million bpd two weeks ago.

Anticipation of an increase in supply by OPEC and non-OPEC members is likely to have a moderating effect on oil prices in the coming weeks.

That said higher prices at the pump hurt the consumer and the government needs to weigh the interests of the oil companies (and the benefits of their investment) against rising consumer dissatisfaction.

The US position - working the political mathFor the US, traditionally higher oil prices adversely affect growth.

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