Oil Futures End Thursday Down

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Intercontinental Exchange Brent futures settled Thursday's session lower after the Organization of the Petroleum Exporting Countries failed to set production cut levels, although they are reported to have reached a preliminary agreement during their biannual meeting in Vienna. Details were unclear.

The lower settlements also come as Saudi Energy Minister Khalid al-Falih cast doubt that an agreement would be reached Friday when they meet with 10 non-OPEC oil producing countries led by Russia aligned with OPEC in a two-year production agreement set to expire at year's end. Ahead of Thursday's meeting, Saudi Arabia said it would propose a 1.0 million barrels per day (bpd) cut by OPEC+, less than a 1.3 million bpd reduction recommended by an OPEC panel last week, indicating a desire not to shock the market.

Global crude prices tumbled from four-year highs at the start of the fourth quarter to 13-month lows in closing out November trade amid a spike in production from the world's three largest oil producers—Saudi Arabia, Russia and the United States. Price pressure from the output surge was exacerbated in early November when it was revealed that the United States granted eight countries waivers from U.S. sanctions on Iranian oil exports, while world economic growth has slowed. Saudi Arabia last month projected global oil output would outpace demand by 1.0 million bpd in 2019 without a production cut.

Al-Falih had called for a united front in addressing the projected global oil supply imbalance in 2019, reiterating that Saudi Arabia wouldn't make the cuts alone. That appears unlikely, with Iran's OPEC Governor blaming Saudi Arabia for the fourth quarter price crash, and said the burden rests with the kingdom in rebalancing the market.

Saudi Arabia crude production was somewhere between 11.2 and 11.3 million bpd this week, al-Falih said in an interview with Bloomberg. The record high production rate was aimed at replacing lost Iranian oil barrels as U.S. sanctions took effect Nov. 5. The U.S. waivers, which caught the Saudis and markets by surprise are speculated to allow Iran to continue to export nearly 1.0 million bpd of crude oil for 180 days.

Wire reports indicate Iran, Libya, Nigeria and Venezuela are seeking exemptions from production cuts. Libya and Nigeria were exempted from the current Vienna accord reached in 2016 because of a civil war and militant activity, respectively that impaired their crude production. Since then, both countries have ramped up output sharply.

Venezuelan crude production has tumbled to multi-decade lows amid incompetence, as the socialist South American country's economy collapses after years of mismanagement.

There's also uncertainty on whether Russia will agree to a production cut. During the Vienna agreement, Russia agreed to a 300,000-bpd production cut. Output by Russia, the world's second largest producer, has since increased to a post-Soviet high following output gains since June to offset lost production from Venezuela and Iran. Russia's oil companies have little appetite in dialing back output after heavily investing in their upstream activity. Reports suggest OPEC will seek a 300,000-bpd production cut by Russia, which compares with a Russian proposal for a 150,000-bpd output reduction.

If OPEC+ fails to reach an accord, oil futures are expected to sell off sharply. Selling might emerge even with an agreement if it's less than 1.3 million bpd.

Oil futures were provided a small and fleeting reprieve after the Energy Information Administration reported a larger-than-expected 7.3 million barrels (bbl) drawdown in commercial crude stocks to 443.2 million bbl for the final week of November. It was the first inventory decline since mid-September, while EIA also reported U.S. crude exports surged 761,000 bpd to a record high 3.203 million bpd, while imports plunged 943,000 bpd to a 7.219 million bpd 8-1/2 month low.

An opening selloff in key U.S. equity indices was also largely walked back, easing selling pressure on oil futures. U.S. equity indices plunged on news a top executive at Chinese technology company Huawei was arrested in Canada at the request of the United States for violating U.S. sanctions against Iran. The arrest of the executive, the daughter of Huawei's founder, could trigger a backlash by China against the United States that inflames trade tensions between the two largest economies. The news comes just days after U.S. President Donald Trump and Chinese President Xi Jinping reached a 90-day truce from Jan. 1 in their trade dispute.

Nymex January West Texas Intermediate futures settled down $1.40 at $51.49 bbl, paring a decline to $50.08. ICE February Brent futures settled $1.50 lower at $60.06 bbl after trading down to $58.36 bbl. Nymex January ULSD futures ended the session with a 3.04 cents decline at $1.8582 gallon that cut an earlier loss to a $1.8314 gallon intra-session low. Nymex January RBOB futures ended down 1.22 cents at $1.4334 gallon, moving off a $1.3748 gallon two-year low on the spot continuous chart.

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

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