Oil Erases Gains in Early Trade

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange (NYMEX) and Brent crude on the Intercontinental Exchange (ICE) continued to erase recent gains in early trade Friday, as traders took profits ahead of the Memorial Day weekend on reports that the Organization of the Petroleum Exporting Countries (OPEC) and 10 non-member nations will likely agree to increase production ahead of OPEC's next meeting June 22 in Vienna.

The energy ministers of Saudi Arabia, Russia and the United Arab Emirates are discussing an output increase of about 1.0 million barrels per day (bpd), sources told Reuters.

Speaking in St. Petersburg, Saudi Energy Minister Khalid Al-Falih told Reuters that "all options are on the table" when asked about the targets on production cuts. In late 2016, OPEC and 10 non-OPEC oil producing countries led by Russia agreed to reduce production by 1.8 million bpd from October 2016 output rates. The cuts took effect Jan. 1, 2017 and were expected to run through year end. Reports suggest Russia already is producing more than its pledge to cut 300,000 bpd.

Near the 9 a.m. ET open, NYMEX July West Texas Intermediate futures gave back another $2.09 barrel (bbl) to $68.62 bbl, while the August contract, which became the second month out Tuesday, was $2.07 lower to $68.61 bbl. ICE July Brent was off $2.03 to $76.76 bbl, while August lost $2.03 to $76.80 bbl. Since Wednesday's Energy Information Administration (EIA) weekly supply report showed an unexpected supply build for commercial crude oil and motor gasoline, spot prices for Brent crude have declined $3.73 bbl, nearly 5%. NYMEX June RBOB futures slipped 4.5 cents to $2.1886 gallon, while the June ULSD contract slipped nearly a nickel to $2.22 gallon.

As prices continued to advance in May, pressure on OPEC to step in and reduce supply cuts became intense, traders said, even though Saudi Arabia is reportedly pushing for oil prices above $80 bbl.

The combination of the re-imposition of Iranian sanctions and plummeting production in Venezuela, down 531,000 bpd or 27% year-on-year in April at 1.436 million bpd and now seen declining below 1.0 million bpd by year-end, have prompted Saudi Arabia and Russia to discuss easing their production agreement.

While OPEC production limits caused output to decline by 1.4% this year to 31.93 million bpd in April, it remains unclear whether sanctions on Iran would reduce the country's oil exports, since the European Union remains at odds with the Trump administration's decision May 10 to re-impose sanctions.

Traders are keeping an eye out for Iranian reaction given Monday's statement by U.S. Secretary of State Mike Pompeo, who outlined a list of 12 "demands" he deemed critical toward Iran rejoining the world community. Reaction so far within the European community has been mixed, traders say, as many contend the requirements are designed to ensure Iran will not be in compliance and would indeed face stricter Trump administration economic sanctions designed to cripple the Iranian economy. Additional Iran sanctions could further limit exports currently estimated at 2.4 million bpd.

However, Iran is counting on support from European deal signatories and support from China and Russia to finance the kinds of foreign direct investment that would restart its economy, which was hobbled by years of international sanctions. Britain, France, and Germany, the three European countries that are also party to the agreement, said they will remain in the Joint Comprehensive Plan of Action, as did China and Russia.

Last week, the European Commission, which is the European Union's executive arm, said it would adopt regulations that would prevent European companies from complying with re-imposed U.S. sanctions. And while increased shale oil production from the United States continues to offset losses elsewhere, including in Canada and Mexico, the new production is not seen as fully bridging the gulf amid ongoing takeaway capacity constraints in the Permian Basin of West Texas.

Brian Whary can be reached at brian.whary@dtn.com