Head of Commodity Strategy
Crude oil, led by Brent, has recovered some of the steep losses that followed last week’s announcement from Russia and Saudi Arabia that they were considering lifting production. This primarily came about in order to replace the involuntary loss of approximately 600,000 barrels/day from Venezuela and Angola seen since the current production cut deal was introduced at the beginning of 2016.
Apart from Saudi Arabia and Russia, only Kuwait and the UAE are currently able to contribute with higher production and this could potentially see some heated arguments at the June 22 meeting in Vienna. Saudi Arabia and Russia are still working closely together and the first signs of rising crude oil prices potentially beginning to hurt demand have potentially made it easy to sell the idea to the other members of the Opec/non-Opec deal.
On that basis we are once again seeing a market being moved by comments from decision-makers within Opec and Russia. The stream of comments is only likely to increase as the important dates of June 22 and 23 approach, with the latter being the day of the Opec/non-Opec meeting following which the group's decision is likely to be announced.
While crude oil could be settling into a range while we await the decision, the gulf between Brent and WTI crude continues to widen. The spread between the two global benchmarks has now reached $10/barrel – the widest in more than three years. As the smoothed-out chart below shows, around two-thirds of the spread widening is related to the cheapness of WTI at the delivery hub at Cushing, Oklahoma relative to the export terminals at Houston. The remainder, being the rise in spread between Houston and Brent, can to a large extent be explained by the rising threat to supplies since Trump stepped away from the Iran nuclear deal back in April.
Increased US crude oil production and lack of pipeline capacity to cope is currently putting inland producers under pressure as the cost of transportation surges.
The hardest hit subvariety is oil priced at Midland, Texas, in the heart of the prolific Permian shale oil region. The discount between WTI crude priced at Cushing and WTI Midland has risen to $12.25/b which means the discount to the international price being represented by Brent has increased to more than $22/b.
While these developments have yet to slow production growth, there is a risk that it could happen. Not least considering that relief from improved infrastructure through the construction of new pipelines is not going to arrive until sometime next year.
Next up we have the weekly dose of US data from the Energy Information Administration’s Petroleum Status Report. The combination of stops being triggered on spread-narrowing trades between WTI and Brent together with surveys pointing to a second consecutive weekly crude stock build has helped sent WTI lower and Brent higher today.
The data will be out at 15:00 GMT, or half an hour later than usual.