Oil Slumps in Early Monday Trade

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange slumped in early trading Monday, with West Texas Intermediate sliding to a fresh five-week low ahead of the November contract's expiration Monday amid building crude supply and increasing production by Saudi Arabia.

Saudi Arabian Energy Minister Khalid al-Falih, in a lengthy interview with the TASS Russian News Agency, said production from the kingdom is at 10.7 million barrels per day (bpd), up from 10.512 million bpd in September and compares to an output rate of about 9.8 million to 9.9 million bpd in April and May.

The Saudis have boosted their production ahead of the Nov. 4 start date to a second phase of U.S. sanctions on Iran that include sanctions on Iran's oil exports. The International Energy Agency said Iranian oil exports dropped 800,000 bpd from April to September following the U.S. withdrawal from the Iranian nuclear accord in May, and expects the decline in Iran's oil exports to accelerate in November.

The Saudi oil minister also reaffirmed Saudi Arabia's capability of producing 12.0 million bpd if necessary. In addition to the 1.3 million bpd in spare capacity in the kingdom, al-Falih said during the interview that the United Arab Emirates have another 200,000 bpd they can bring to market. The UAE produced 3.004 million bpd of crude oil in September, according to data from the Organization of the Petroleum Exporting Countries.

One might call al-Falih's interview part of a "charm defense" following Saudi Arabia's acknowledgement late Friday (10/19) that Saudi dissident and journalist Jamal Khashaoggi was killed in the Saudi Consulate in Istanbul, Turkey, on Oct. 2. The official statement is that Khashaoggi died during a fist fight at the consulate. Several U.S. senators on both sides of the aisle have indicated they are insulted by the explanation.

The Saudis said they have fired five top officials and arrested 18 others. Saudi Foreign Minister Adel al-Jubeir said during a weekend interview Khashaoggi's death was the result of a "rogue operation," and that Crown Prince Mohammed bin Salman had no prior knowledge of the operation.

U.S. President Donald Trump said he would work with Congress in determining how to respond. The Saudis are a critical strategic partner for the United States as the Trump administration seeks to end Iran's military adventurism in the Middle East. The Saudis and Iran are regional rivals.

Turkey's President Recep Tayyip Erdogan said he would reveal the facts of the incident "in all their naked truth" on Tuesday. Turkey previously said they have video and audio recordings of Khashaoggi's death and dismemberment. Turkey last week sought a waiver from U.S. sanctions to buy Iranian oil.

Domestically, commercial crude supply is restocking quickly during seasonal refinery maintenance, which is the heaviest in five years in the Midwest, with stocks up 20.5 million barrels (bbl) during the three weeks that ended Oct. 12. Crude supply could continue to build at a sharp rate into November, with Plains All American expected to start service on an expanded Sunrise Pipeline early next month that connects Midland, Texas, to Cushing, Oklahoma. The startup would bring as much as 500,000 bpd of additional capacity on line, helping to alleviate the bottleneck out of the Permian basin in western Texas and eastern New Mexico.

WTI futures moved out of backwardation and into a contango market structure last week on easing supply concerns, although the Brent market remains in backwardation. Brent's premium to WTI is trading near an $11 bbl 4-1/2 month high.

Nymex November WTI futures eased to a $68.27 five-week low on the spot continuous chart ahead of the contract's expiration Monday afternoon, down about $0.50 to $68.60 bbl at last look. December WTI was trading at a $0.30 premium to the expiring contract.

ICE December Brent futures were down $0.35 near $76.45 bbl. Nymex November ULSD futures were up marginally near $2.3035 gallon, with a tight distillate market lending upside support to the commodity with the start of the heating season.

Nymex November RBOB futures were down 2.4 cents near $1.8890 gallon, edging off a $1.8783 7-1/2 month low on the spot continuous chart. Gasoline stocks are near a record high for this time of year.

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

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