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Oil slides as U.S. climate withdrawal compounds glut concerns

While U.S. stockpiles have edged lower, rising American production and drilling is fanning concerns that OPEC's efforts to trim a global glut will be hampered.

Brent crude tumbled below $50 Friday afternoon, heading for a second straight week of losses, while Benchmark Brent crude futures were off by 1.8 percent at $49.73 per barrel, down 90 cents from the previous close.

West Texas Intermediate (WTI) for July delivery on Friday fell US$0.70 to settle at US$47.66 per barrel on the New York Mercantile Exchange. The contract gained 4 cents to $48.36 on Thursday.

President Donald Trump's controversial decision to withdraw from the 2015 Paris climate agreement on Thursday sparked additional concerns that USA oil production could expand rapidly in the absence of a stringent focus on curbing the use of fossil fuels.

Some commodity markets were also absorbing news that President Donald Trump said he would withdraw the United States from the landmark 2015 global agreement to fight climate change, a move that fulfilled a major campaign pledge but drew condemnation from USA allies and business leaders.

Concerns that the ongoing rebound in USA shale production could derail efforts by other major producers to rebalance global oil supply and demand pressured crude prices.

Production then dropped 1 million barrels per day over 18 months as oil prices fell from above 100 to below 40 Dollars.

In May, the Organisation of the Petroleum Exporting Countries, OPEC, and a number of non-OPEC producers met in Vienna to extend a deal to cut 1.8 million b/d from the market until March 2018.

As more U.S. drilling mean greater hardship for OPEC and other major producers' attempt to control output so as to cut the global supply glut and alleviate prices.

"As these numbers are getting confirmed, the initial optimism about OPEC's temporary cuts, may turn to increasing skepticism about OPEC's choice of policy once the current output deal expires next year", says Bjørnar Tonhaugen, VP Oil Markets at Rystad Energy.

"If OPEC wants to keep the market balanced next year, they will probably need to extend the production cut to all of 2018", Martijn Rats, managing director at Morgan Stanley in London, said by email.

While shale's recovery means next year's supply situation "looks weighty", OPEC's output cuts now mean that if inventories accumulate again, it would be from a lower level, said Ed Morse, head of commodities research at Citigroup in NY.

Faced with lingering glut woes, the oil cartel discussed last week reducing output by a further 1 to 1.5 percent, and could revisit the proposal should inventories remain high, according to sources.

Oil prices moved higher following the EIA inventories data on Thursday, but there was selling pressure above $49.00 p/b and prices retreated again late in the U.S. session.

Dean Popplewell has almost two decades of experience trading currencies and fixed income instruments.

This article is for general information purposes only. You could lose all of your deposited funds. He has a deep understanding of market fundamentals and the impact of global events on capital markets. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.

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