Oil Futures Pull Back on OPEC

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange pulled back Monday, with the U.S. crude benchmark consolidating below $40 barrel (bbl) after Saudi Arabia, Kuwait and United Arab Emirates announced they would allow voluntary output cuts of 1.18 million barrels per day (bpd) to expire on June 30 while other producers, including Mexico and Libya are seen boosting production in the coming weeks, threatening to derail the recent price rally.

"There is no room for non-conformity!" declared Saudi Energy Minister Prince Abdul-Aziz Bin Salman when addressing laggard compliance by some OPEC+ members, with OPEC+ having agreed on April 12 to reduce their oil production by 9.7 million bpd for May and June. The 23-nation alliance, led by Saudi Arabia and Russia, over the weekend agreed to extend the 9.7 million bpd in output cuts through July, which would have tapered down to 7.7 million bpd for the second half of 2020 without action. Continuing the agreement will require noncompliant members, namely Iraq and Nigeria, to make up the missed targets in July, August and September.

However, hours after the deal was sealed Mexico appears to have pulled out of the agreement, citing hardship for its oil industry bruised by decades of mismanagement. Libya, another wild card, announced Sunday it resumed some of its production at the southern fields of El-Feel and Sharara with combined capacity of 400,000 bpd.

Output at the fields halted in January amid a military offensive by military forces loyal to Khalifa Haftar, a commander based in eastern Libya. His fighters shut down most of the country's crude production, which plunged from 1.2 million bpd to some 90,000 bpd.

Against this backdrop, a trio of the Gulf producers -- Saudi Arabia, Kuwait and UAE -- announced Monday their voluntary extra cuts of 1.18 million bpd will expire at the end of June.

Some analysts suggest noncompliance is just one of the problems facing Saudi Arabia and Russia right now. The larger issue could be the return of shut-in U.S. shale production; prices seemed to have stabilized around $40 bbl, near breakeven for many North American producers. Parsley Energy Inc. and WPX Energy Inc. have reportedly brought back some of their wells, even as they continue to put off most new drilling.

"We're seeing production coming back in pretty much all of the basins," said Kelcy Warren, chief executive of pipeline giant Energy Transfer in the interview to Wall Street Journal Monday. "It's been a steady recovery since the first week of May," she continued.

At its peak, the United States was producing more than 13.1 million bpd of crude, the most in the world. EIA data shows output declined to 11.2 million bpd during the final full week of May.

At settlement, NYMEX West Texas Intermediate July futures dropped $1.36 to $38.19 bbl after trading at $40.44 bbl overnight. Brent crude for August delivery slid $1.50 to $40.80 bbl. NYMEX RBOB July futures declined 1.86 cents from a better than three-month spot high $1.2354 gallon to settle at $1.1950 gallon. NYMEX ULSD futures dropped back 2.93 cents at $1.1213 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges