June 6 (UPI) — The ripple effects of an unclear economic policy and division among parties to an OPEC-led effort to balance the market sent oil prices lower early Monday.
The January implementation of an agreement led by the Organization of Petroleum Exporting Countries, with help from key producers like Russia, helped establish a floor under crude oil prices of around $50 per barrel during most of the first half of the year. Last month, parties to the agreement agreed to extend, rather than enhance, the arrangement — a disappointment to many investors.
On Monday, Saudi Arabia, the main contributor to the OPEC move to cut production, led a regional effort to sever ties with Qatar, a fellow OPEC member, because of alleged support for terrorist groups like al-Qaeda and the group calling itself the Islamic State.
“Given the persisting bearish sentiment in the oil market, the unprecedented move might not have a long-lasting impact on oil prices,” Tamas Varage, an analyst with London oil broker PVM, said in a daily emailed newsletter. “But it is worth keeping in mind that Persian Gulf countries produce about 21.5 million barrels of oil per day.”
The Persian Gulf is also a choke-point for the regional flow of oil. While the geopolitical issue would normally act to pull oil prices higher, the rift could undermine OPEC’s efforts to balance the market through multilateral efforts.
The price for Brent crude oil was down 1 percent about 15 minutes before the start of trading in New York to $49.45 per barrel. West Texas Intermediate, the U.S. benchmark price for the price of oil, was down 0.84 percent to $47.76 per barrel.
Last weeks’ decision from U.S. President Donald Trump to start the process of ending the country’s involvement in the Paris climate treaty created negative headwinds for oil prices because it added impetus to pro-oil policies in a country seen as counter-balancing OPEC’s efforts through gains in shale production.
Speaking from an economic forum in Tokyo, Mitsuhiro Furusawa, the deputy managing director for the International Monetary Forum, said geopolitical issues ranging from the upcoming general elections in the United Kingdom to geopolitical tensions in Asia were spilling over to create pressures on the economic levers in China and elsewhere in the region.
“A key uncertainty is the lack of clarity about U.S. economic policy, including the size and composition of an expected fiscal stimulus,” he said. “A faster than expected increase in interest rates and significant appreciation of the U.S. dollar could exacerbate public debt vulnerabilities in Asia’s emerging and developing countries.”