After six straight days of declines, oil prices inched higher on Tuesday, though there are many doubts that OPEC will be able to reduce global crude inventories gain caps.
“Crude is trading like a game of musical chairs,” explains Richard Fullarton, who is the founder of the London-based commodity hedge fund, Matilda Capital Management. “If OPEC extends cuts then more Brent and WTI will head to the east” which in turn will drive up shipping costs.
Indeed, oil prices showed, last week, their biggest weekly drop since early March, a result of accelerating US supply that has put pressure on prices. This weakness has actually been more evident in Europe, where the crucial North Sea market continues to show signs of excess.
Additionally, Brent crude LCOc1 posted an upward trend at 8 cents, to $51.68 per barrel, while US crude futures CLc1 showed an upward trend of 4 cents, at $49.27 per barrel. Overall, though, Brent remains down 10 percent since late last year, even in the face of many efforts led by OPEC (and Russia) to reduce output by 1.8 million barrels per day through the first half of this year.
According to JPMorgan senior oil analyst, David Martin, “It is evident that Atlantic Basin crude markets are struggling to clear. North Sea crude market differentials have slumped in recent weeks, highlighting the tepid pace of market tightening thus far.”
In the meantime, a technical committee consisting of both OPEC and non-OPEC countries is believed to have concluded a session on Friday which has resulted in a six month extension of current output cuts. The prolonging of this current output agreement will more than likely give more strength to Dubai crude since supply of heavy crudes will probably still be quite limited. OPEC is next set to meet in Vienna on May 25 as we await the pending North Sea crude loading data, some time later this week.
Finally, UBS commodity analyst Giovanni Staunovo comments, “The production cuts mean there is less heavy oil supply. If you look at the loadings for the North Sea you see a pick up, so one market is better supplied than the other.”