Oil falls on increase in output and escalating trade spat

Singapore — Oil prices fell on Tuesday on the expectation that producer cartel Opec and key ally Russia will gradually increase output after withholding supplies since 2017.

The escalating trade dispute between the US and China, in which both sides have threatened stiff tariffs on each others’ key export goods, also kept markets on edge and triggered a sharp sell-off in Chinese shares. The Shanghai stock index slid below 3,000 points for the first time in nearly 21 months.

Brent crude futures were at $74.90 a barrel at 2.41am GMT, down 44c, or 0.6%, from their last close.

US West Texas Intermediate (WTI) crude futures were at $65.55 a barrel, down 30c, or 0.5%.

Opec, together with a group of non-Opec producers including Russia, started withholding oil supplies in 2017 to prop up prices.

Following a sharp increase in crude prices from their sub-$30 a barrel lows in 2016, the group on June 22 will meet in Vienna, Austria, to discuss forward policy.

Greg McKenna, chief market strategist at futures brokerage AxiTrader said there was likely to be oil price volatility in the week ahead of the meeting.

“Opec is fractured or fracturing,” McKenna said, as Iran, Venezuela, and Iraq “seek to veto the production increase”.

“We could be seeing the long-term relationship between the Saudis and Russia pushing Opec into second place,” he added.

Rob Thummel, MD at asset management firm Tortoise said he “would recommend a small increase in production … [as] the global oil market is potentially vulnerable to an oil price spike” due to low inventories.

“We believe that Opec will act like a central bank going forward, raising and lowering production as necessary with an objective of keeping global oil inventories at normal, five-year levels,” Thummel said.

The other key development for global markets is the escalating trade dispute between the US and China, in which both sides have threatened stiff tariffs on each others’ key export goods.

If implemented, China may react to US tariffs by putting a 25% duty on US crude oil imports, which have been surging since 2017, to a business now worth almost $1bn a month.

Energy consultancy Wood Mackenzie said the US “would find it hard to find an alternative market that is as big as China”.

China takes around 20% of all US crude exports, according to Wood Mackenzie.

Reuters