Oil slumps as Saudi Arabia and Russian ministers signal output increase

Oil slumps as Saudi Arabia and Russian ministers signal output increase

According to Reuters, the discussions were triggered by complaints from US President Donald Trump that the oil price has soared too high and was being propped by artificially by OPEC, after Brent Crude hit its highest level since late 2014 at $80.50 this month. This is primarily due to crude oil's surge to a 3½-year high on supply worries related to Venezuela and Iran.

The major trigger for the drop was instigated by none other than Saudi Arabia, the world's largest oil exporter and kingpin of the OPEC oil cartel.

More tellingly, the gap between volatility on bearish puts and bullish calls expiring just after June 22 has grown in the last few weeks, as expectations for OPEC to keep its supply strategy unchanged have waned. With OPEC and allies achieving a key goal of eliminating the global surplus despite record production in the USA, traders now are weighing whether Saudi Arabia and Russian Federation will go ahead with their plan to revive output without reaching consensus with allies.

The majority of oil prices drop in the market after having vast pressure from the rising supply concerns. Although US oil exports hit a record high of 2.6mn bpd in the middle of May, there is concern that the US port infrastructure has insufficient capacity to support the increasing supply.

However, the period of low (say sub-$70 to the barrel for Brent) oil prices seems to be over - for at least 2018. It confirms our view that while funds must react to short-term price developments the limited exposure seen now could act as the engine that takes gold higher once the technical outlook improves enough to warrant buyers to return. "There is, therefore, scope for an increase in OPEC output while still maintaining supply cuts for the remainder of the year", Tchilinguirian added. It will be made in June, when OPEC+ meets to discuss the matter further.

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The Saudis have an opportunity with the July OSPs, likely to be released next week, to show they are serious about two issues now dominating crude oil markets. Additionally, ongoing disruptions in economically fragile OPEC member Venezuela and potential losses from fellow group member Iran because of renewed US sanctions on the Islamic Republic are likely to partially offset this higher supply, the bank said.

"The pace of the recent rise in oil prices has sparked a debate among investors on whether this poses downside risks to global growth", Chetan Ahya, Chief Economist at USA bank Morgan Stanley wrote over the weekend in a note.

"The government is aware of the country's vulnerabilities to abrupt changes in the worldwide oil situation and impending threats on the same, hence we are formulating various strategies to address those vulnerabilities to cushion the impact for our consumers", Cusi said on Monday.

Whatever the movements in spot prices, the majority of oil companies have had to adapt to lower oil prices over the past couple of years, drastically cutting costs and investment.

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