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Oil Slips as Increased Output Prospect Overshadows OPEC Pact

Crude-oil futures turned lower Monday as investors focused on the prospect of increased output from some countries, even after OPEC and allied nations agreed Saturday to extend a production cut of nearly 10 million barrels of oil a day through the end of July.

Overall compliance to the production-cut deal, which was a sticking point headed into the gathering, has been a consistent worry, experts said.

A fear of a ramp-up in output from North American shale-oil producers as prices of crude climb, a refusal by Mexico to adhere to production cuts and a report that Libya has restarted production at its largest oil field, has undercut optimism about an extension of the historic output-cut agreement, the Wall Street Journal reported. The combination of Mexico and Libya could contribute add 400,000 barrels a day of crude.

West Texas Intermediate crude for July delivery the U.S. benchmark, was off 77 cents, or 2.2%, at $38.70 a barrel, with an intrasession peak on Monday at $40.44 a barrel. On Friday, the front-month WTI contract finished for the trading period, with a weekly gain of 11.4%, according to Dow Jones Market Data.

Global benchmark Brent oil for August delivery, meanwhile, retreated 64 cents, or 1.4%, at $41.71 a barrel, with an intraday high at $43.41, after the contract posted a weekly gain of 11.8% on Friday.

Both grades of oil finished Friday trade at their highest levels since March 6 and booked a sixth consecutive weekly gain in anticipation of the pact from the major oil-producing giants.

The Organization of the Petroleum Exporting Countries and some of the biggest oil producers in the world, collectively known as OPEC+, concluded a videoconference meeting on Saturday, adopting measures aimed at cutting the excess production depressing prices as global aviation remains largely grounded due to the coronavirus pandemic. The curbed output represents some 10% of the world’s overall supply.

Markets had hoped that the alliance of major crude producers could strike an accord to extend a cut of output, which would have begun to taper in July, for at least another month as the crude industry contends with a pandemic that has sent much of the world spiraling into recession—an economic backdrop that is bearish for oil uptake.

The WSJ reported that key OPEC member, Libya, exempt from previous quotas because of a long-running civil war, ended a five-month shutdown at its Sharara oil field, citing government officials.

OPEC+ had initially agreed in April that it would cut supply by 9.7 million barrels per day during May-June to prop up prices that collapsed due to the coronavirus crisis. Those cuts were due to taper to 7.7 million bpd from July to December. The cuts will be reviewed monthly, with the next meeting slated for June 18.

Goldman suggested that the limited scope of the extension implies a shift in strategy for major OPEC producers that may be aimed at reining in U.S. oil production.

“By targeting normalized inventories without committing to an extended cut that would benefit long-term sentiment and high-cost producers, we believe that OPEC remains focused on sustainably increasing revenues through a combination of higher prices but also higher market share.” wrote commodity analysts at Goldman Sachs, including Damien Courvalin, Callum Bruce and Jeff Currie, in a research report that was published before OPEC’s deal.

Reuters reported that Saudi Arabia sharply raised its monthly crude prices for July.

“While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” Reuters quoted Helima Croft, head of global commodity strategy at RBC Capital Markets, as saying.

Meanwhile, U.S. oil may face some pressure from North American shale-oil producers if they respond to the partial recovery in crude prices by rapidly ramping up their output, during a time when oil uptake is expected to taper for season reasons.

Commodity traders were also paying attention to storm Cristobal, which weakened to a tropical depression on Monday, after hitting the oil-rich Gulf Coast region of the U.S. over the weekend. Investors watch such storm because they can have an impact on crude-oil supplies. 

Source: Marketwatch