Oil prices drop on US output, concerns Russian compliance in OPEC deal

oil prices
Oil prices slipped on Monday on concerns that Russian crude output may rise as production at the Sakhalin-1 project is set to grow by one-quarter to between 250,000-260,000 b/d. Shell photo.

Some analysts look for oil prices to drop even if OPEC extends pact

US oil prices fell by over 1 per cent on Monday due to higher production in the United States as well as concerns that Russian crude output may soon be on the rise.

By 1:06 p.m. EST, US WTI had recouped some of its losses earlier in the session, but was still down by 81 cents to $58.14/barrel and Brent crude dropped by 28 cents to $63.19/barrel.  The Canadian Crude Index fell to $40.53.

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On Friday, Russia said it supported extending the OPEC supply cut agreement, but did not say how long the pact should be prolonged.  And on Monday, Reuters reported Russia may find it hard to comply with its pledge.

Crude output from the Sakhalin-1 project in Russia is expected to rise to 250,000 to 260,000 barrels per day (b/d), up by roughly one-quarter, according to sources.

“It’s the OPEC parlor game that we’re all playing,” John Kilduff, partner at Again Capital LLC in New York told Reuters.  He added “The Russians being quiet about their intentions about the OPEC deal is a little unsettling.”

Barclays analysts say they expect the OPEC cuts to continue for at least six months, and possibly for as long as nine months.  But, they added the extension is widely expected, so oil prices could still fall after the cartel meets in Vienna on Nov. 30.

“This week, we expect volatile prices as market participants shed length,” Barclays said in a note. “Prices might fall in the immediate aftermath of the deal as speculative length ‘sells the news’. Still, fundamentals should keep Brent at an average of $60 a barrel this quarter.”

Harry Tchilinguirian, head of oil strategy at French bank BNP Paribas agreed, saying he sees “plenty of room for disappointment”.

“Should the outcome of the next OPEC meeting fall short of expectations, the large net-long speculative position on oil futures can unwind, sending prices lower and volatility higher.”

The US Energy Information Administration reported that since mid-2016, US oil production has risen by 15 per cent and now sits at 9.66 million b/d.  US production is closing in on Russia and Saudi Arabia output and increased drilling activity in the United States suggests output will continue to grow.

Last week, Baker Hughes reported the US rig count had risen for the first time since July to 747.

During last week as well, US crude prices hit their highest mark since the middle of 2015, rising to $59.05/barrel.  The shutdown of the Keystone pipeline due to a leak in South Dakota a week earlier caused the boost in prices.

The Alberta to US pipeline is expected to restart this week.