Oil prices dropped on Thursday after Saudi Arabia and Russia announced they would increase their production to offset supply shortfalls due to the reimposition of US sanctions against Iranian crude exports. Apache photo.
Oil prices hit four-year highs earlier in the week
Oil prices fell from four-year highs on Thursday after the Saudis and Russia announced they would increase their production to help offset supply shortfalls resulting from the upcoming US sanctions on Iranian crude exports.
By 3:12 p.m., EDT, benchmark Brent crude futures fell $1.54 to $84.75 and US West Texas Intermediate crude futures slipped $1.95 to $74.46/barrel. The Canadian Crude Index dropped $2.82 to $35.53.
According to Reuters, price charts show crude futures are sitting at technically overbought levels. Brent hit the most technically overbought level since February 2012 on Wednesday and US WTI neared its most overbought since January.
“The market was a bit over-extended on a short-term basis,” Brian LaRose, senior technical analyst at ICAP-TA told Reuters.
“I would need to see both $84.35 and $82.85 broken (for Brent) to suggest that something more than just a minor rest stop in an ongoing uptrend is likely to take place here.”
As well, data from the Genscape showed US crude stocks had risen by about 1.7 million barrels last week.
The Trump administration’s sanctions against Iranian crude exports officially begin on Nov. 4. Iran is OPEC’s third largest producer and, in May, Iran exported 2.71 million barrels per day (b/d) of crude, about 3 per cent of the world’s daily consumption.
On Thursday, Saudi Arabia’s Energy Minister Khalid al-Falih said OPEC will increase its production by 1.3 million b/d, but did not say that the cartel would actually do so.
Reuters reported on Wednesday that the Saudis and Russia agreed to a private deal that would allow the two oil producing kingpins to increase their output.
Reuters reports that the Saudis plan to invest $20 billion to maintain and perhaps increase its spare crude production capacity. Saudi Arabia currently has a maximum sustainable capacity of 12 million b/d.
On the demand side, rising oil prices and escalating trade concerns are pressuring emerging economies, according to Fatih Birol, Executive Director of the International Energy Agency.
“There is concern that high prices may derail economic growth and harm oil demand,” Carsten Fritsch, senior commodities analyst at Commerzbank told Reuters.
One of the emerging economies, India, is facing an “economic crisis” because of its reliance on oil imports, according to the country’s Transport Minister Nitin Gadkari. India has also been impacted by the rising US dollar and the decline of its rupee.
The stronger greenback is starting to have an impact on the demand for crude as a higher dollar makes oil more expensive for customers using other currencies.
“We have argued recently that reaching the $100 market would be a tall order. We still maintain this view but sometimes it makes more sense to put a time rather than a price limit on a rally,” PVM Oil Associates strategist Tamas Varga told Reuters.
“About the end of November, we will have a good idea as how many barrels will be lost due to the launch of the second round of the Iranian sanctions. By that time all the bullish news will be in the market.”