Oil Slides After Saudis Unexpectedly Cast Doubt On Production Cut Extension

One week after "unnamed sources" reported that Saudi Arabia had backed the proposed 6 month extension to oil production cuts, this morning oil is lower after the world's biggest oil producer appeared to backtrack on its trial balloon from last week, when Saudi Arabia’s energy minister said it is "too early" to decide whether OPEC will extend its crude-production-cutting agreement for the rest of the year.

Quoted by the WSJ, Khalid al-Falih, told reporters in Riyadh Monday that “it is premature to talk about extending the cut.” OPEC’s 13 national ministers are scheduled to decide that question on May 25.

Falih’s unexpectedly cautious tone "has taken some of the wind out of the bulls’ sails," according JBC analysts.

It wasn't just the sudden Saudi retiscence: as the WSJ adds, Falih’s comments were among a range of factors keeping pressure on oil prices, chief among them that U.S. drilling is now set to increase by 123,000 barrels a day in May, according to the U.S. Energy Information Administration, the steepest monthly rise since February 2015. The EIA figures are the latest sign that U.S. companies have been quick to increase production because of higher prices and has “added another bearish element to the market,” said JBC analysts.

A surge in U.S. production is a major threat to OPEC’s effort to reset the still-oversupplied global oil market. The U.S. oil rig count has been on the rise 13 weeks and now stands at its highest level in two years, according to oil-field services firm Baker Hughes Inc. The number of U.S. active drilling rigs rose again last week—by 11 to 683.

“You have supportive data from Saudi Arabia showing a large drop in exports but on the other hand you have an increase in U.S. production,” said Olivier Jakob from Switzerland-based consultancy Petromatrix.  “The prices are going lower,” he said. “There is some profit-taking on short positions.”

In nearly-daily public jawboning, OPEC has alleged good compliance with the oil output cuts, with Saudi Arabia contributing the most: the oil price shot up from the mid-$40s as recently as 3 weeks ago after expectation of an extension to the production cuts in May re-emerged following OPEC's recent Kuwait meeting.  Until now, those trends had “put investors in optimistic mood,” said analysts from Commerzbank Commodity Research, however Saudi Arabia - reassessing the market share gains by US shale producers - appears to have reassessed.

Meanwhile, even as data due on Wednesday is expected to show U.S. inventories shrinking for only the 2nd week in 2017, US drillers have continued to add rigs for past 13 week.

"At this rate, the U.S. is likely to reach a new recent record level of production by the end of the third quarter” Olivier Jakob added.

It's not just supply, however: concerns about oil demand have also weighed on prices. The IEA said last week that global oil demand is expected to grow at a slower pace for the second year in a row. The IEA reduced its forecast for 2017 demand growth to 1.3 million barrels a day, warning that this outlook could still “prove optimistic.”

Don't count oil just yet, with China - as usual - left as the last hope for oil bulls. As the WSJ adds, "there are signs oil prices could go higher. Chinese gross domestic product for the first quarter rose more than expected, at 6.9%. China is one of the world’s largest oil consumers and its intake of crude fell only by 50,000 barrels a day in March from the January and February average. Good Chinese economic growth “could spur additional oil consumption,” said Michael Poulsen, oil risk manager at Global Risk Management."