11 Jul 2018

Saudi increases production in a meaningful way

At the start of last week, the market was greeted by a typically candid tweet from President Trump: “Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction [sic] in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference...Prices to[o] high! He has agreed!”

By the end of the week it became clear that, whether at Trump’s behest or not, the Saudi’s had decided to increase production in a meaningful way and indeed had been doing so already according to reports that the Kingdom’s June production figures would be 10.5m b/d, up by nearly 500k b/d on May. The market softened as a consequence and Brent relied on support from the 50-day average at 76.63 $/b. This weakness in Brent came in spite of threats from Iran to close the Strait of Hormuz at the mouth of the Persian Gulf (through which 17m b/d of crude is shipped) in retaliation for US sanctions. Mohammad Ali Jafari, commander of the Revolutionary Guards, was quoted as saying: “We will make the enemy understand that either everyone can use the Strait of Hormuz or no one [can].” Meanwhile, there is no end in sight to the disruption to Libyan exports.US crude futures performed more strongly than Brent and set a new high of the year over 75 $/b. Brent has entered a short term downward-sloping channel with resistance at 78 $/b and support at the 50-day average and 75.50 $/b area.

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