Brent rallies, oil market cautious ahead of June 22 OPEC meeting

U.S. stocks edged lower today, with the U.S. decision to impose tariffs on steel and aluminum imports from the European Union, Canada, and Mexico reigniting trade-war fears.

Oil, which helped drive a rally for stocks Wednesday, began pulling back ahead of U.S. supply data. According to MarketWatch, a rally for oil prices and an easing of worries about Italian politics drove a rally for stocks on Wednesday, with the Dow climbing 306.33 points, or 1.3%, to close at 24,667.78, taking back most of Tuesday’s 392-point drop. The S&P 500 gained 1.3%, also recovering its losses from the prior session. The Nasdaq Composite COMP, -0.11% was up 0.9%.

Brent crude futures had risen 70 cents on the day to $78.42 a barrel, while U.S. West Texas Intermediate crude was down $1.1 to $67.11 a barrel.

That pushed the premium of Brent to WTI beyond $11 a barrel, the largest since March 2015. That spread has doubled in less than a month, as a lack of pipeline capacity in the United States has trapped a lot of output inland, as FreightWaves recently reported on.

“The Brent-WTI is blowing out. I think there must be what looks like some capitulation going on in the spread between those two contracts,” Saxo Bank senior manager Ole Hansen said.

The wider premium makes U.S. crude exports more competitive than those linked to the Brent price, such as North Sea or West African grades of oil.

U.S. crude stockpiles rose by 1 million barrels in the week to May 25, according to the American Petroleum Institute (API). Analysts had expected a drop of 525,000 barrels, which dented U.S. futures earlier in the day.

Sources told Reuters that Saudi Arabia, the effective leader of OPEC, and Russia were discussing boosting output by about 1 million barrels per day (bpd) to compensate for losses in supply from Venezuela and to address concerns about the impact of U.S. sanctions on Iranian output.

“The fact that we saw the Saudi-Russia announcement last week could have attracted some interest in narrowing the spread, given that we were looking for some of the geopolitical risk (in Brent) to be removed, but that’s been overtaken by the domestic widening in crude prices in the U.S.,” Hansen said.

Prices for physical barrels of U.S. light sweet crude delivered at Midland are at their largest discount to the benchmark U.S. futures price in almost four years.

“U.S. shale is alive and well and growing at an annual rate well in excess of 1 million bpd,” consultant JBC Energy said in a report. “Growth is expected to remain in place, but widening crude differentials due to infrastructure bottlenecks do actually speak in favor of a slowdown in growth.”

OPEC and non-OPEC producers have committed to cut output by 1.8 million bpd until the end of 2018 but will decide at a meeting in late June whether to prolong this.

“If this is a real correction, then the price should get down to the low $70s or even the mid-$60s,” SEB chief commodities analyst Bjarne Schieldrop said. “The market needs to be cautious ahead of the OPEC meeting.”

With one session left to close out May, the Dow is set to mark a 1.5% monthly rise, the S&P 500 is poised to gain 2.6% and the Nasdaq is set to book a 5.7% increase. An even bigger gain is in store for the Russell 2000 index of small-cap stocks which is set to gain nearly 7%. The index finished at an all-time high on Wednesday, up 1.4%, to 1,646.36, and rose a further 0.1% on Thursday.

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