MARKET WATCH: Crude oil prices tumble as Saudis signal unilateral production increase

Energy prices fell June 10 with crude dropping 2.6% to less than $100/bbl on reports Saudi Arabia will unilaterally increase production targets by as much as 500,000 b/d after an acrimonious meeting of the Organization of Petroleum Exporting Countries earlier in the week.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 13 -- Energy prices fell June 10 with crude dropping 2.6% to less than $100/bbl on reports Saudi Arabia will unilaterally increase production targets by as much as 500,000 b/d after an acrimonious meeting of the Organization of Petroleum Exporting Countries earlier in the week.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “There has been some suggestions Saudi Arabia might push up production levels to 10 million b/d in July and that it is targeting Asian customers for the additional barrels.”

Meanwhile, he said, “Iran and Saudi Arabia are exchanging harsh words over the management of OPEC, with Iran not disguising that it is considering the [June 8 meeting] fiasco of last week as a great victory against the evil West and its ally, Saudi Arabia.” He said, “We would not exclude that Saudi Arabia now targets its additional barrels at the current buyers of Iranian crude oil, especially those customers in the Far East. With the sanctions that Iran is facing [from the US and United Nations over its nuclear program], it will be a bit more problematic for it to respond to the Saudi supply push in Asia, and we therefore could fall into a situation where Iran is forced back into floating storage.”

Citing a recent report in the Wall Street Journal, analysts in the Houston office of Raymond James & Associates Inc. said, “While the world's attention has largely been focused on the events of the Arab Spring, Iran has continued to advance its nuclear program. The International Atomic Energy Agency's recent report on Iran indicated that the country has enriched 970 kg of uranium, bringing its total supply of reactor-grade enriched uranium to 4,105 kg. In addition, the regime's Revolutionary Guards Corps posted an article in April unabashedly discussing an Iranian nuclear test. Clearly, US and UN sanctions have done little to curb Iran's nuclear pursuits. As such, it will probably take more than finger wagging to derail Iran's nuclear agenda.”

Volatile trading
Trading in the oil futures markets was volatile last week. Corporate stocks also were down June 10. “The Standard & Poor’s 500 index fell 1.4% on further controversy regarding a Greek sovereign debt bailout,” said Raymond James analysts. “European finance ministers have called for a special meeting (expected to take place June 14) to further discuss specifics of a possible bailout package.” The energy sector also experienced weakness, they said.

“This is apparently the first time since 2002 that there are six consecutive weeks of losses in the main US [stock] indices,” Jakob said.

“So far, crude oil and especially Brent crude oil has shown a lot of resistance to the retracement occurring in equities and the correction in the euro,” said Jakob. “The correlations have weakened both to the S&P and to the euro. If the slide in equities continue, we do not think that crude oil will be able to stand on its own, this for global margin call reasons and for cash realization where it is still possible. We do not think that the crude oil market is strong enough not to suffer from a spill-over in any continuation of a weakening in equities and the euro.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted term structures for both West Texas Intermediate and North Sea Brent crude weakened June 10 along with the flat price. “But it was much more pronounced in WTI,” he said. “Oil product prices followed crude down but held relatively better than WTI, which should further improve the margins for refineries who have access to WTI.”

Zhang noted the front-month WTI contract had a net loss of 93¢/bbl last week “while front-month Brent shot up by $2.94/bbl, which pushed the spread between WTI and Brent to the widest level since mid-February.”

Jakob said, “The Brent premium to WTI has for us now reached a level of total irrelevance. We can buy the argument that Brent and WTI need now to be totally disconnected one vs. the other (i.e., the Brent-WTI spread should not be traded anymore) but if we then don’t focus on the Brent-WTI spread but purely on the flat price of Brent, our opinion is still that Brent is overbought on the basis of its spread values, its crack values, and the increased OPEC real flows. We fear that Brent futures are now falling into investment overdrive.”

The July contract for benchmark US light, sweet crudes fell $2.64 to $99.29/bbl June 10 on both the New York Mercantile Exchange and the US spot market for WTI at Cushing, Okla.

Prices for other energy commodities were not available at presstime June 13.

Contact Sam Fletcher at samf@ogjonline.com.

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