Oil slumps towards US$64 a barrel as Opec clash looms

Tokyo

OIL fell near US$64 a barrel as Saudi Arabia and Russia prepared for a clash with allied crude producers over whether to lift output, and as China and the US exchanged threats over trade.

Futures in New York dropped as much as 2.3 per cent, on course for the lowest close since April 9, after a 2.7 per cent decline last Friday. Iran said that Venezuela and Iraq will join in blocking a proposal to increase production that is backed by Saudi Arabia and Russia when the Organization of the Petroleum Exporting Countries (Opec) and its allies meet in Vienna this week. China said that it would impose tariffs on a variety of US goods, including crude oil and petrol, in response to US President Donald Trump's US$50 billion levy on Chinese imports.

Crude oil has dropped more than 10 per cent from its high in May amid signs that Saudi Arabia and Russia are seeking to lift output curbs that have eliminated a global surplus and boosted prices. Meanwhile, traders are trying to digest the impact from both the US and China issuing tariffs on goods and the threat of a broader trade war between the world's two largest economies.

"Oil is down in a knee-jerk reaction to possibilities of a trade war intensifying between the US and China, and Opec's production increase breaking the demand and supply balance," said Takayuki Nogami, chief economist at state-backed Japan Oil, Gas & Metals National Corp, in Tokyo. "If the US and China continue to retaliate, and Saudi Arabia and Russia keep signalling a production increase, that will further weigh on prices."

West Texas Intermediate (WTI) crude for July delivery fell as much as US$1.47 to US$63.59 a barrel on the New York Mercantile Exchange and traded at US$64.02 at 4.01 pm in Tokyo. The contract declined US$1.83 to US$65.06 on Friday. Total volume traded was about 44 per cent above the 100-day average.

Brent futures for August settlement lost as much as 99 US cents to US$72.45 a barrel on the London-based ICE Futures Europe exchange. The contract dropped US$2.50 to US$73.44 on Friday. The global benchmark crude traded at a US$9.22 premium to WTI for the same month.

Trading on the Shanghai International Energy Exchange is closed for a Chinese public holiday. The contract fell 0.2 per cent on Friday.

Investors are looking ahead to what could be the most contentious Opec meeting in recent years. On the one side is Saudi Arabia and Russia, who want to relax the quotas as soon as next month. In the other corner is Iran, Iraq and Venezuela, who are threatening to veto the Saudi-Russian proposal. "If the Kingdom of Saudi Arabia and Russia want to increase production, this requires unanimity. If the two want to act alone, that's a breach of the cooperation agreement," Iran's Opec representative Hossein Kazempour Ardebili said.

Opec and its allies could consider a production increase of as much as 1.5 million barrels a day, Russian Energy Minister Alexander Novak said last Thursday, while Saudi Arabia has been discussing different scenarios that would raise production by between 500,000 and one million barrels a day, according to people familiar with the matter.

The group's main event begins on Friday, and while Saudi Arabia has already said that it is inevitable that the bloc will lift output after the meeting, the question remains whether there will be an official agreement.

Meanwhile, the brewing trade war between the US and China also stole investor focus and caused nervousness across markets. The yen and gold gained on increased demand for safe-haven assets, while the US dollar edged higher after Treasury yields steadied.

Mr Trump said that the US will impose tariffs on US$50 billion in Chinese imports, with the first wave of tariffs to cover US$34 billion of goods and take effect on July 6. In response, China quickly issued a list of product categories, covering about US$34 billion in exports from the US, to be subject to an additional 25 per cent tariff starting on July 6. A second set of China's duties to begin at a later date listed other goods including coal, crude oil, petrol and medical equipment. BLOOMBERG