Oil markets continued to pull back by about $2 to $3 a barrel on Thursday, driven down by rising US crude inventories to record levels and continued high levels of production output by most petroleum producing countries.
Volatility in the oil markets remained high, with both WTI and Brent crude encountering losses and pulling back by around $3 each. Brent slipped from a near two-month high at $62.97 a barrel to extend as low as $59.23 on Wednesday and $59.54 early Thursday, while WTI declined from $53.39 to consolidate just above $50 at $50.32 on Wednesday and trading at $50.64 early Thursday.
“For the past two weeks US Crude Inventories have been announced far above forecasts, which has rekindled concerns over the aggressive oversupply of the commodity in the markets and there is a chance traders are getting in early by already pricing in a decline,” said Jameel Ahmad, Chief Market Analyst at Limassol-based broker ForexTime (FXTM).
“The over-supply concerns are still extensive and it is not just US crude inventories that are driving them, possible rises of output from Saudi Arabia and Russia are also being reported. I do feel that the oversupply issues are so severe that the oil markets will always be at risk of a sudden pullback like we saw on Wednesday, unless a substantial decline in production is noticed.”
That being said, there is no doubting investor sentiment towards the commodity has changed over recent weeks. After losing over 50% of its value in over just a couple of months, arguments that it was heavily oversold are valid. Nonetheless, being able to recover around 20% of these losses when the economic conditions have not changed (if anything the over-supply is growing) is still some accomplishment.
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“Crude oil prices declined on concerns that the recent rally is overdone amid a continuing supply glut. The price rise of 34% since mid-January has largely been fuelled by cuts to capital spending and falling US rig counts, which have yet to result in a fall in near-term production,” Reuters quoted an analyst report from ANZ bank.
US crude stocks rose by 14.3 mln barrels last week, data by industry group the American Petroleum Institute showed after Wednesday's settlement, compared with analyst expectations of an increase of 3.2 mln barrels.
If the build is confirmed by US Energy Information Administration data due at later on Thursday, it will be the largest weekly growth since EIA data became available in 1982, Reuters added.
Meanwhile, production from the world's biggest exporter – Saudi Arabia – may be increasing further, averaging 9.7 mln barrels per day since last June but … demand has pushed output to just under, if not above, 10 mln bpd.
Oil had rallied over the past month, with Brent rising 35% from a mid-January low on short-covering by traders fearing the market had hit bottom after a 60% price crash since June. Violence in Iraq and Libya, both important oil producers, added fuel to the rebound.
Last week, analysts at Citigroup slashed their forecast for crude oil to $20 a barrel before prices begin to recover based on two points: the amount of crude oil in storage and the end of OPEC’s role as the so-called swing supplier.
West Texas Intermediate (WTI) crude oil for March delivery closed at $44 a barrel on January 29 and at $52.65 last Friday, with reports that foreign producers have been leasing tankers to sail around in circles with cargoes of crude waiting for the price to rise.
In the U.S., shale drillers have been cutting back on rigs at a pace of more than 80 a week for the past several weeks. But the cuts to rigs are not being accompanied by cuts in production.
OPEC’s influence on oil markets has been diminishing since the mid-1980s, and the so-far imputed ability of U.S. shale producers to replace the cartel as the world’s swing producer may soon be tested.
“Until demand can sop up the extraordinary supply, prices should remain low but are unlikely to fall to $20 a barrel. There is a caveat, though: should producers be unable to find swaps dealers willing to hedge future production, prices could go much lower than they are today,” 24/7 Wall St.com reported.
Market participants are more optimistic about futures prices than swaps dealers, but as long as shorts vastly outnumber longs among the swaps dealers, producers will have difficulty hedging future production. Rig counts will continue to fall and production eventually will fall with the rig counts. What is unlikely, though, is that another $30 a barrel will be lopped off the price of crude, the website added.
