Oil Falls on Prospect of Supply Boost, But Market's `Nervous'

(Bloomberg) -- Crude declined after U.S. President Donald Trump put pressure on Saudi Arabia to ramp up oil output, with traders worrying about how it could affect spare capacity ahead.

Following last week’s rally, futures fell today in both London and New York after Trump tweeted over the weekend that Saudi King Salman bin Abdulaziz had agreed to boost production to the kingdom’s maximum capacity in a push designed to overcome supply losses from Canada to Libya.

“The commodity has gotten incredibly politicized now, beyond the supply-demand dynamic,” said John Kilduff, a partner at New York-based hedge fund Again Capital LLC. Trump’s pressure on Saudi Arabia “is making the market nervous that it won’t have any spare capacity, and/or the Saudis will do some harm potentially to their fields and rate of production,” he said.

The U.S. benchmark crude rallied more than 10 percent in June amid tightening inventory levels and global supply outages that increased the demand for domestic production. That’s despite OPEC’s pledge to boost supply levels, with Saudi Arabia’s crude exports already surging to a 15-month high in June.

West Texas Intermediate crude for August delivery slid 21 cents to settle at $73.94 a barrel on the New York Mercantile Exchange.

The premium at which front-month WTI futures traded to the September contract widened to $2.32 on Monday, the biggest premium for the front-month spread since 2014.

Brent for September dropped $1.93 to end the session at $77.30 a barrel on the London-based ICE Futures Europe exchange. The global benchmark traded at a $5.68 premium to WTI for September.

See Also: Oil short-sellers flee as multiple supply snags fuel rally

Following Trump’s tweet, the White House said Saturday in a statement that King Salman bin Abdulaziz affirmed that Saudi Arabia has 2 million barrels-a-day of spare production capacity “which it will prudently use if and when necessary to ensure market balance and stability, and in coordination with its producer partners, to respond to any eventuality.”

The White House statement aligned with one by the state-run Saudi Press Agency saying that the king and Trump, in a phone call Saturday, discussed efforts by the oil-producing countries to compensate potential shortages in oil supply.

Iran Oil Minister Bijan Namdar Zanganeh said any production increase above the limits agreed to by OPEC would “breach” the deal, according to a letter he sent to OPEC President Suhail Al Mazrouei and distributed by the Iran Oil Ministry’s news service Shana.

Brent fell more than WTI as OPEC production increases generally affect the international benchmark more, according to Phil Flynn, a senior market analyst for Price Futures Group Inc.

"There was a lot of concern about his tweet," Flynn said. But, there are "lingering doubts" about Saudi Arabia’s ability to increase production by that level.

Other oil-market news:

• Gasoline futures fell 2.2 percent percent to settle at $2.1048 a gallon.
• U.S. crude stocks seen dropping 6 million barrels, according to a Bloomberg survey of analysts.
• Cushing crude stocks probably fell 2 million barrels, according to a Bloomberg forecast.
• Libya’s National Oil Corp. declared force majeure on another two oil ports, removing thousands more barrels from the market.

--With assistance from Tsuyoshi Inajima, Sharon Cho and Grant Smith.

To contact the reporters on this story: Jessica Summers in New York at jsummers24@bloomberg.net;Erin Douglas in New York at edouglas16@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Catherine Traywick, Mike Jeffers

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