Oil Dips as Rising U.S. Yields Steer Bulls

 

Oil prices were little changed at around $74 a barrel on Monday on rising U.S. borrowing costs and the prospect of further output rises after another increase in the weekly rig count, although the overall picture for crude remained bullish.

 

Brent crude futures were down 1 cent at $74.05 a barrel by 1145 GMT, while U.S. West Texas Intermediate (WTI) crude futures were down 11 cents at $68.29 a barrel.

 

Prices were supported by nervousness over the decision President Donald Trump must take by May 12 on whether to restore U.S. economic sanctions on Iran.

 

"Underlying sentiment is bullish ... we've got an important decision from Trump coming up in May and we have OPEC potentially trying to 'overtighten' the market," Saxo Bank senior manager Ole Hansen said.

 

"(Fund managers) need a continuous flow of bullish news for their position to be maintained and this week, it's not a matter of just watching the oil market."

 

Broader financial markets were under pressure from the rise in U.S. government yields towards 3 percent, a level that in the past has triggered aggressive sell-offs in stocks, bonds and commodities.

 

"Whether a break above 3 percent will have an impact on currencies remains to be seen, but to have an overall rising cost of finance at a time when Saudi Arabia is aiming at $100, something is going to give. Last time we were at $100, interest rates were rock-bottom and that wasn’t a concern to anyone. This time around, it's a different story," Hansen said.

 

Despite slipping on Monday, the oil market remains well supported, especially by strong demand in Asia.

 

Prices have risen by 25 percent in the last year thanks to supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC) that were introduced in 2017 to prop up the market.

 

"Added price pressure comes from U.S. sanctions against the key oil exporting nations of Venezuela, Russia and Iran," said Kerry Craig, global market strategist at J.P. Morgan Asset Management.

 

He was referring to action the U.S. government has taken on Russian companies and individuals, as well as on potential new measures against struggling Venezuela and especially OPEC-member Iran.

 

"Stay long oil," J.P. Morgan said in a separate note.

 

The United States has until May 12 to decide whether it will leave a nuclear deal with Iran and impose new sanctions against Tehran, including potentially on its oil exports, which would further tighten global supplies.

 

That said, U.S. drilling activity is now at its highest in three years and a rising weekly rig count points to further increases in U.S. crude production <C-OUT-T-EIA>, which is already up by a quarter since mid-2016 to a record 10.54 million barrels per day (bpd).