Oil jumps on supply outages
Crude rises amid outages in Libya, despite higher output from Saudi Arabia, Russia
Oil prices reversed gains after hitting $75 a barrel on Tuesday, as Saudi Arabia said it is prepared to pump more oil to ease supply constraints in the market.
Prices swung wildly. Light, sweet crude for August delivery traded in the morning at the highest level since November 2014, before reversing course and falling more than 1%.
More recently, it pared losses to be down 0.1% at $73.89 a barrel (all figures US) on the New York Mercantile Exchange. Brent, the global benchmark, fell 0.1% to $77.26.
Supply disruptions have lifted prices to multi-year highs this year, and U.S. futures have rallied recently on supply outages in Libya and at a Canadian facility that weighed on available U.S. crude supply. However, the possibility of more supply being added to the market helped ease concerns.
In a Tuesday statement, Saudi Arabia asserted its willingness to use spare production capacity to increase market supply. Over the weekend, President Donald Trump called on the country to increase production to help ease fast-rising crude prices.
The Organization of the Petroleum Exporting Countries, along with other producers including Russia, agreed to increase output at a June meeting, though oil prices continued to rise after the announcement.
“Let’s see how fast this ramps up from Russia and from Saudi,” said Tariq Zahir, managing member of Tyche Capital Advisors. “If Saudi does come through and gets up to a 2-million barrel increase in production, then I think we can see prices come down.”
Traders also cited chatter in the market that Mr. Trump would decide to tap the Strategic Petroleum Reserve for extra barrels of crude. At this point, such talk is just speculation in the market. Dipping into the reserve is a possibility that energy secretary Rick Perry has said he opposes.
“The force majeure [in Libya] and Canada added some unexpected chaos,” Mr. Zahir said.
“We’re in a massively tight market in the short term.”
The crude market has balanced out due to an effort by the Organization of the Petroleum Exporting Countries and a handful of external producers such as Russia since last year to remove almost 2% of the supply and mop up an oil glut that was weighing on oil prices.
Analysts differ on how much spare capacity Saudi Arabia can bring to the market to offset the tightening of the market, but some say the kingdom could increase exports by destocking while it prepares to increase its production capacity.
“We now expect Saudi supply to rise in July to around 10.8 million barrels per day, which would represent a record figure for Saudi Arabia,” said analysts for JBC Energy in a recent report.
Meanwhile, Russia has also ramped up its output by about 100,000 barrels a day.
“Right now the market is caught between two forces,” said Michael Cohen, the head of energy commodities research at Barclays.
“Supply side disruptions that are bullish for oil, and demand side forces including the threat of trade protectionism that threaten the global economy and would thus be bearish for oil prices and most other commodities.”
“If Saudi does come through and gets up to a 2-million barrel increase in production, then I think we can see prices come down.” TARIQ ZAHIR TYCHE CAPITAL ADVISORS