Oil Reverses Gains in Early Trade

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange reversed overnight gains in early trading Monday following news that U.S. President Donald Trump dispatched U.S. Secretary of State Mike Pompeo to meet with Saudi Arabian King Salman bin Abdulaziz Al Saud in an attempt to diffuse heated rhetoric over the weekend between the United States and Saudi Arabia regarding a missing journalist.

The Saudis threatened to retaliate against any sanctions that might be imposed on the kingdom following comments from Trump that the Saudis would face "severe punishment" if the government ordered the assassination of Jamal Khashoggi, a prominent critic of the Saudi regime that fled to the United States. Reports suggest Khashoggi, who wrote for the Washington Post, was lured to the Saudi consulate in Turkey, where a hit squad from Saudi Arabia tortured and dismembered him.

The Saudis have denied ordering the assassination, and have said they are working closely with the Turkish government to uncover what occurred to the Saudi citizen. Trump this morning said he had spoken with King Salman, who denied any knowledge of what might have happened to Khashoggi.

On Sunday, the Saudi Press Agency issued a statement that, "The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom's economy has an influential and vital role in the global economy and that the Kingdom's economy is affected only by the impact of the global economy."

The weekend's noxious discourse between the two allies is unfolding three weeks in front of the re-imposition of U.S. sanctions on Iranian oil exports following the U.S. pullout of the Iranian nuclear accord in May. The International Energy Agency on Friday said Iranian oil exports have dropped by 800,000 barrels per day (bpd) since April, and expects the export rate to continue lower.

IEA had also pushed oil producers to produce as much as they can during the fourth quarter, when demand is expected to peak near 100 million bpd, while adding global spare oil capacity has fallen to 2% of world oil demand. Most of that spare capacity resides in Saudi Arabia, with the kingdom indicating it can produce as much as 12.0 million bpd if necessary. In September, Saudi crude production averaged 10.512 million bpd, the highest output rate since November 2016.

Crude oil prices would spike if Saudi Arabia held oil off the market, which would have a damaging effect on the world's economy.

As the market awaits the discussions between the Saudi king and Pompeo, oil futures are under pressure from concern over global economic growth, with a slowdown translating into lower demand for oil. Heightening trade tension between the United States and China have prompted worry over world economic growth. Criticism over China's trade policy during a weekend meeting between the International Monetary Fund and the World Bank added to the concern.

In its most recent report with data through Oct. 9, the Commodity Futures Trading Commission shows noncommercial traders continue to reduce a net-long position in West Texas Intermediate futures.

At last look, Nymex November WTI futures were down $0.35 near $71.00 barrel (bbl), with the ICE December Brent contract $0.45 lower near $80.00 bbl. Nymex November ULSD futures were down 1.4 cents near $2.3075 gallon, while the November RBOB futures contract swung 2.25 cents lower to $1.9185 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

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