- Crude Oil Slumps on Supply Concerns after Four Days of Gains
Crude oil prices dropped yesterday ending a four-day winning streak amid concerns about the rising inventory in the global market as the Organisation of Petroleum Exporting Countries (OPEC) mulls production cuts.
Apart from the surplus inventory in the oil market, growing fears of an economic slowdown, which saw European and Asian stock markets tumble again, added further pressure on crude oil prices.
Reuters reported that the global Brent crude futures, the international benchmark for oil prices, were at $66.07 a barrel, down 72 cents, or 1.08 per cent, from their last close.
US West Texas Intermediate (WTI) crude futures were at $56.63 per barrel, down 57 cents, or one per cent.
Russian Energy Minister, Alexander Novak said on Monday that his country, which is not an OPEC member, planned to sign a partnership agreement with the group, and that details would be discussed at OPEC’s December 6 meeting in Vienna, Austria.
The plan by OPEC and Russia to cut supply to the international market followed an increased alarm that supply has started to outpace consumption.
US President Donald Trump had posted a tweet meant to put pressure on OPEC not to cut supply to prop up prices.
Trump’s tweet followed reports that Saudi Arabia was considering a production cut at the December OPEC meeting.
The United States’ sanctions against Iran, which took effect on November 4, are expected to reduce supply to the global market.
However, a US decision to grant waivers to some of Iran’s oil customers, who faced the prospect of a drop-off in supply from the sanctions, has also helped soothe concern about availability of crude.
The Head of Paris-based International Energy Agency (IEA), energy advisor to about 26 industrialised countries, Fatih Birol, said on Monday that oil supply cuts by key producers could have negative implications for markets.
He appealed to market players to use “common sense”.
Speaking at a news conference with central European energy ministers in Bratislava, Birol reportedly said markets were currently well supplied but spare capacity in Saudi Arabia was thin and cuts by key players could tighten markets.
“Currently markets are very well supplied but we should not forget that spare capacity in Saudi Arabia is very thin, therefore cutting the production significantly today by key oil producers may have some negative implications for the markets and further tightening the markets,” he said.
Birol yesterday warned of the effects of geopolitical instability on prices.
“We are entering an unprecedented period of uncertainty in oil markets,” Fatih Birol told a conference in Norway.
Oil prices are around a quarter below their recent peaks in early October, weighed down by surging supply, especially from the United States, as well as a slowdown in global trade.
US crude production has soared almost 25 per cent this year, to a record 11.7 million barrels per day (bpd).
Amid the uncertainty, financial traders have become wary of oil markets, seeing further downside risk to prices from the growth in U.S. shale production as well as the deteriorating economic outlook.
Portfolio managers have sold the equivalent of 553 million barrels of crude and fuels in the last seven weeks, the largest reduction over a comparable period since at least 2013.
Funds now hold a net long position of just 547 million barrels, less than half the recent peak of 1.1 billion at the end of September, and down from a record 1.484 billion in January.
Concerned about an emerging production overhang similar to the one that led to a price slump in 2014, OPEC is pushing for a supply cut of 1 million to 1.4 million bpd.
“We expect OPEC to agree to a supply cut at its next official meeting on December 6,” Reuters quoted French bank, BNP Paribas, as saying.
The bank added that it expected Brent to recover to $80 per barrel before the year-end.
“In 2019, we expect WTI to average $69 per barrel and Brent $76 per barrel,” BNP said.
The IEA, however, warned OPEC and other producers of the “negative implications” of supply cuts, with many analysts fearing a spike in crude prices could erode consumption.