OPEC+ boost sinks ANS

Cartel shocks with plan to boost production as tariffs fan recession talk

Steve Sutherlin

Petroleum News

In a choppy sea of tariff-induced trading uncertainty, the Organization of the Petroleum Exporting Countries and its allies threw a wave of cold water on crude oil bulls, sending traders in search of shelter March 3, after the cartel agreed to boost production in the face of looming 25% U.S. tariffs on Canada and Mexico.

Traders already were worried that if the announced but postponed tariffs on Canada and Mexico were in fact imposed, a trade war could slow economic activity and dent oil demand while stoking inflation. The OPEC+ action was a catalyst for a price slide.

Alaska North Slope crude and Brent each plunged $1.56 per barrel March 3 to close at $71.01 and $71.62 respectively, and West Texas Intermediate dropped $1.39 to close at $68.37.

The slide continued March 4, sending ANS 52 cents lower to close at $70.49, while WTI slid 11 cents to close at $68.26 and Brent shed 58 cents to close at $71.04. A nascent relief rally was leveled when the White House announced that the 25% tariffs on Mexico and Canada -- except for a 10% levy on Canadian oil -- would be imposed April 2. An additional tariff of 10% on China was imposed on top of a previously imposed 10% China tariff.

On March 5, losses accelerated as crude traders factored in the impending tariffs. ANS plummeted $1.55 to close at $68.95, WTI plummeted $1.95 to close at $66.31 and Brent plummeted $1.74 to close at $69.30.

Some analysts questioned the timing of the OPEC+ production hike. According to its March 3 announcement, the cartel will introduce an increase of 138,000 barrels per day from April, gradually boosting output by 2.2 million barrels per day -- some 2% of global supply. The group said it could pause or reverse the action if conditions warranted.

"Analysts were thinking they would surely defer the increases given the macroeconomic threat from tariffs," said David Fyfe, Argus Media chief economist was quoted in a March 4 New York Times article.

A bearish surprise build in U.S. commercial crude inventories further pressured prices.

The inventories for the week ended Feb. 28 jumped 3.6 million barrels week to 433.8 million barrels -- 4% below the five-year average for the time of year, according to U.S. Energy Information Administration data released March 5.

The build dwarfed expectations in a Reuters analyst poll calling for a 341,000-barrel rise on average. Analysts answering a Wall Street Journal poll had predicted crude inventories would increase by just 200,000 barrels.

JP Morgan analysts quoted in a March 5 Reuters report said global oil demand averaged 103.6 million bpd -- a year-over-year increase of 1.6 million bpd -- short of the bank's projected 1.8 million bpd rise for the month. The analysts said a 100-basis-point slowdown in the U.S. GDP growth rate had the potential to reduce global oil demand growth by 180,000 bpd.

In contrast, EIA's petroleum product inventory data offered a bit of support to crude oil bulls.

Total motor gasoline inventories fell by 1.4 million barrels to 246.8 million barrels -- 1% above the five-year average for the time of year, the EIA said. Distillate fuel inventories fell by 1.3 million barrels to 119.2 million barrels -- 6% below the five-year average for the season.

Gasoline stocks were forecast by the Wall Street Journal poll to fall by 500,000 barrels.

ANS fell 47 cents Feb. 28 to close at $72.57, as WTI fell 59 cents to close at $69.76 and Brent fell 86 cents to close at $73.13.

Prices notched gains Feb. 27 as ANS jumped $1.40 to close at $73.03, WTI leapt $1.73 to close at $70.35 and Brent advanced $1.51 to close at $74.04.

From Wednesday to Wednesday, ANS dropped $2.69 from its Feb. 26 close of $71.64 to $68.95 on March 5.

At March 5 closing prices, ANS traded at a $2.64 premium over WTI, while trading at a 35-cent discount to Brent.

Trump grants a tariff reprieve for autos

With softening on North American tariffs, "the market is quickly repricing worst-case growth concerns," Stephen Innes, SPI Asset Management managing partner told MarketWatch. "The knee-jerk demand fears that had crude getting battered might be a little overdone, and we could see a base-building process take shape if sentiment shifts toward a less chaotic macro backdrop."

"I'm done trying to front-run Trump's next move," Innes said. "Trading based on his policy pivots is like trying to play 3D chess against an opponent who just flips the board whenever he feels like it."

The crude-oil market "finds itself in the worst of all worlds right now," Michael Brown, Pepperstone senior research strategist said in a note.

OPEC+ hikes production as the U.S. economy stalls, China continues to struggle, and the Trump administration cries "drill baby, drill," Brown wrote. "All in all, that's probably as convincing a bear case as it's possible to build and should see both Brent and WTI continue to slide, particularly now that the psychological floor at $70 a barrel has broken."