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Business News/ Industry / Energy/  Oil prices fall as Russia floats gradual production increase
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Oil prices fall as Russia floats gradual production increase

Oil prices fall as Russia hints it may gradually increase output, after having withheld supplies in concert with Opec since 2017

The Middle East dominated Opec as well as a group of non-Opec producers led by Russia started withholding output in 2017 to tighten the market and prop up prices. Photo: ReutersPremium
The Middle East dominated Opec as well as a group of non-Opec producers led by Russia started withholding output in 2017 to tighten the market and prop up prices. Photo: Reuters

Singapore: Oil prices fell on Friday as Russia hinted it may gradually increase output, after having withheld supplies in concert with the Organization of the Petroleum Exporting Countries (Opec) since 2017.

Brent crude futures were at $78.43 per barrel at 12.27pm, down 36 cents, or 0.5%, from their last close, and 2.6% below the $80.50 multi-year high they reached on 17 May. Brent broke through $80 for the first time in more than three years earlier in May.

US West Texas Intermediate (WTI) crude futures were at $70.44 a barrel, down 27, or 0.4%, cents from their last settlement.

“Oil prices are now starting to drift a little," said Greg McKenna, chief market strategist at futures brokerage AxiTrader, adding that this was due to Opec’s and Russia’s “moves toward an increase in production" at a meeting scheduled for next month.

The Middle East dominated Opec as well as a group of non-Opec producers led by Russia started withholding output in 2017 to tighten the market and prop up prices.

But Russia, in particular, has been floating a potential end to the production cuts, with energy minister Alexander Novak saying on Thursday that restrictions on oil production could be eased “softly" if Opec and non-Opec countries see the oil market balancing in June.

“The Russians have always struck me as production cut tourists keen to get off the boat and crank up production as soon as inventories were stabilised and prices once again elevated ... That possibility is top of the mind for traders and as a result oil prices are slipping," McKenna said.

US investment bank Jefferies said that increased barrels by Russia and Opec “may be necessary to keep the market supplied", especially if U.S. sanctions lead to a fall of Iranian exports later this year.

Higher prices come at a cost

While Russia and Opec benefit from higher oil prices, which have risen by almost 20% since the end of last year, their voluntary output cuts have opened the door to other producers to ramp up output and gain market share.

US crude oil production has risen by more than a quarter in the last two years, to 10.73 million barrels per day (bpd). Only Russia produces more, at around 11 million bpd.

Output by producers like the United States, Canada or Brazil which are not bound by the Opec/Russian led agreement to cut, will likely rise further as higher crude prices improve their profitability.

“With oil prices rising more than costs, average industry profitability has turned positive this year," Bernstein Energy said in a note this week, adding that the 50 largest listed oil companies globally “need $47 per barrel oil prices to break even in aggregate".

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Published: 25 May 2018, 12:53 PM IST
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