By Barani Krishnan
Investing.com - For better or worse, the world’s oil producers decided last week to defy Saudi Arabia and push for higher output over the next three months. After patting them on the back — even rewarding them — the market is now saying it was definitely for the worse.
Crude prices fell more than 4% on Monday, reversing the pre-Good Friday rally, as traders frowned upon the decision by OPEC+ to put to rest its year-long production cuts on the assumption of increasing summer demand for oil.
The 23-member OPEC+ —comprising the original 13 members of the Saudi-led Organization of the Petroleum Exporting Countries and 10 other oil producing nations steered by Russia — said on Thursday it will pump an additional 350,000 barrels per day in May and June, and a further 400,000 daily in July. Saudi Arabia initially did not want an output hike, but gave in to pressure from the rest in the cartel.
While the announcement was greeted by a friendly market at that time, it was viewed with a different lens on Monday due to stubborn coronavirus situations outside the United States.
Latest reporting on the Covid-19 pandemic showed the U.K. variant of the virus continuing to scorch parts of Europe — with Poland experiencing 60 times more cases than a year ago. India, meanwhile, saw a record of more than 100,000 infections daily over the weekend. Europe, as a region, is one of the single largest consumers of oil while India itself is the third largest crude buyer.
London-traded Brent, the global benchmark for crude, settled down $2.71, or 4.2%, at $62.15 per barrel. Brent’s session low was $61.25, a bottom not hit March 25.
New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled down $2.80, or 4.6%, at $58.65. WTI earlier hit a two-week low of $57.63.
Crude prices also came under pressure as Iran opened talks with global powers in Vienna to find a way to end the two-year-old U.S. sanctions on its oil imposed by the former Trump administration. The White House, now under President Joseph Biden, is agreeable to ending the sanctions, provided Tehran shows proof that its nuclear program isn’t capable of producing an atomic bomb. Iran is, however, demanding the sanctions be removed first before it makes such concessions.
The standoff between the two sides — with U.S. officials not even attending the talks in person at Iran’s insistence and using intermediaries from other world powers to press Tehran — indicates that an agreement won’t be done too soon.
While that should be positive for oil prices, the problem for the market is Iran has been violating the sanctions for some time, selling oil secretly to China, even when Trump was in office. Since the current administration took office in January, Iran has become much bolder with the violations, as Biden has been paying lip service more than anything to Trump's sanctions.
Even if Iran doesn’t get a deal to drop the sanctions right away, it will continue adding oil to the market — on top of the OPEC+ supply hike that will come on from May. That’s what's really worrying the market now.