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Oil Slides Again; Bear Market Stays Despite OPEC Talking up Cuts

Published 06/03/2019, 01:08 PM
Updated 06/03/2019, 04:23 PM
© Reuters.
- - The OPEC bull charged at the trade war bear on Monday, but the sellers won the day.

Assurances by Saudi Arabia's Energy Minister Khalid al-Falih that OPEC was committed in "balancing" oil prices (the cartel's language for production cuts) provided just temporary relief Monday from the selling that had gripped crude futures since last week, leaving them about 20% down from April's highs that effectively defined a bear market.

U.S. West Texas Intermediate crude settled down 25 cents, or 0.5%, at $53.25 per barrel, after rising 2% in earlier trade. It was WTI's weakest close since Feb. 12.

U.K. Brent crude finished the session down 71 cents, or 1.2%, at a four-month low of $61.28. It climbed 1.4% earlier in the day.

Crude futures rallied in European trading after Falih indicated that a consensus was emerging between OPEC and allies led by Russia over an extension of the output cut agreement.

Falih insisted that the group was near an agreement to extend their deal, which currently expires at the end of this month, to the second half of the year to "rebalance" the market. Despite speculation of a delay until July, OPEC is still scheduled to hold its official meeting on June 25 in Vienna, with non-OPEC ministers expected to join the following day, he added.

But as trading moved into the U.S. session, early gains in WTI and Brent faded as worries about the Trump administration's multiple trade conflicts returned to the fore.

Both ended in the negative as stocks on Wall Street tumbled again following a slump in tech stocks amid reports that the Justice Department might probe antitrust violations.

Traders also cited a huge build of nearly 3 million barrels in crude stockpiles at the Cushing, Okla., delivery hub for WTI contracts as the reason for the market's slide.

Crude futures hit 2019 highs in April, with WTI reaching $66.60 and Brent $75.60, from the combination of OPEC production cuts and U.S. sanctions on Iranian and Venezuelan crude exports. Since then, the escalating U.S.-China trade row has had a greater impact on the oil market's narrative, with the clash between the two economic titans sparking worries about a global recession.

President Donald Trump's threat last week to impose tariffs of 5% to 25% on Mexico to punish the country for not stopping illegal migration to his satisfaction broke the last vestiges of the market, handing bulls a 16% loss in May alone for WTI.

Mexico sells car components, televisions, clothing, alcohol, agricultural products and fuel to the U.S. in daily trade amounting to $1.7 billion. While Mexico sent a trade delegation for talks with officials in Washington on Monday, the oil market needed to see more proof of progress before prices could rise further, said traders, echoing Trump's words that he wanted "action, not just talk".

Aside from trade conflicts with China and Mexico, the Trump administration has also removed India -- another giant economy with more than a billion consumers -- from the U.S. Generalized System of Preferences, which gives favorable access to goods from developing countries. That move alone could cost $300 million in lost trade.

"The main risk for crude oil is to see a further erosion of the refining margins if the global economy weakens further, in reaction to the White House policies," said Olivier Jakob, analyst at Petro Matrix in Zug, Switzerland.

"Speculators are not taking any chances, and are reducing further their net length in crude oil futures,” Jakob said. “There is likely more clearing of positions that needs to be done."

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