Commodities: Oil producers' war of words escalates market volatility

Oil futures endured another volatile trading session on Monday, as the negative impact of the ongoing war of words between Iran and Saudi Arabia spilled over into the new trading week.

Iranian oil minister Bijan Zanganeh told the Mehr News agency over the weekend that Tehran would continue increasing its oil production and exports. His remarks came ahead of an oil producers conference in Doha on 17 April that Iran has decided not to attend.

On Friday, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman told Bloomberg: “If all countries agree to freeze production, we will be among them.”

But added that Iran needed to be among those countries “without a doubt”, raising fears of oversupply and an escalation of the tussle for oil market share between the Saudis and Iranians.

Meanwhile, a Reuters survey published last week indicated that OPEC’s oil production rose in March, having stabilised in February, following higher production from Iran and near-record exports from southern Iraq. Iraq alone produced over 4m barrels per day, second only to Saudi Arabia among all of OPEC's 13 member nations.

At 1707 BST, the Brent front month futures contract was 0.88% or 34 cents lower at a three-week low of $38.33 per barrel, having registered marginal gains earlier in the Asian session. Concurrently, WTI futures, fell 0.46% or 17 cents to $36.62 per barrel.

Tom Pugh, economist at Capital Economics, said, “In our view, some sort of compromise agreement is still likely in Doha, even without Iran’s full participation. At face value Saudi comments seem to rule out a deal, given Iran’s determination to raise production following the easing of Western sanctions.

"However, three points support our view that a compromise could still be reached. First, the Deputy Crown Prince’s comments were off-the-cuff and should not be interpreted as the last word. Second, it is worth remembering that Saudi Arabia, along with Russia, Qatar and Venezuela, was one of the architects of the initial proposals to freeze output back in February. It would therefore seem a bit odd to insist on a condition that they know would never be met, given Iran’s evident determination to raise output.

“Third, a deal should still benefit Saudi Arabia, as well as Iran. Indeed, even if Prince Mohammed’s comments are taken at face value, a deal could be done on the basis that Iran would agree to increase output by no more than a certain amount.”

Capital Economics is sticking to its end-2017 forecast of $60 per barrel for both WTI and Brent, but expects oil prices to end this year at $45 per barrel, only marginally higher than their current levels.

Away from oil markets, precious metals also headed lower despite the dollar weakening considerably against the yen. The COMEX gold June futures contract fell 0.23% or $2.80 to $1220.70 an ounce, while spot gold was down 0.48% or $5.85 to $1,216.75 an ounce.

COMEX silver fell 0.24% or four cents to $15.01 an ounce, while spot platinum also slid 1.56% or $14.95 to $942.10 an ounce; retreating further from the psychological $1,000 an ounce level.

Headline base metal futures saw lacklustre trading across the London Metal Exchange board, marked by low volumes with China and Hong Kong closed for business. At 1635 BST, the primary aluminium (+0.7%) three-month futures contract appeared to be among the few in positive territory.

Liz Grant, senior account executive at Sucden Financial, said, "Impact of the holiday in China and Hong Kong was reflected in the low turnover of business on the LME. Price activity was “mixed”, trading either side of Friday's close, drifting, with no fresh features to report.”

Finally, agricultural commodity futures were firmly in negative territory. CBOT corn (-0.07%), wheat (-1.00%), ICE cocoa (-0.73%) and cotton (-0.25%) futures slipped in early trading calls stateside.