Oil prices tested new lows at the start of the week, with the market more vulnerable to price volatility as volumes shrink and traders square their books for the end of the year.
The world benchmark North Sea Brent crude oil futures traded as low as US$36.08 in early trading in London, a price not seen since 2004, before the surge in Chinese demand brought oil prices up beyond $100 a barrel.
Oman futures on the Dubai Mercantile Exchange were down 80 cents at a low of $31.21 a barrel.
Both recovered some ground, and Brent was down $1.62 at $36.29 by late afternoon Arabian Gulf time, while Oman futures were down 49 cents at $31.52.
In the absence of any major news affecting supply and demand, the market may get some support from a shift in trader sentiment.
“According to the latest data released by the CFTC [US Commodity Futures Trading Commission], speculators pushed up their overall bullish bets on WTI for the time in 6 weeks,” said Hussein Al Sayed, the chief market strategist in the Middle East for IG, the market spread play outfit.
“This is an indication that covering short positions could be seen towards the year end, leaving bearish traders worried about a spike in prices, although with low volumes,” Mr Sayed added. “However, this doesn’t change the midterm bearish outlook. Any rally in oil for the next couple of days would be attributed to technical buying rather than a trend reversal.”
Despite a rapid slowdown in output growth from producers outside of Opec, oil market oversupply has persisted.
But some analysts see a ray of hope for early next year if major suppliers, including Saudi Arabia, can cut back production because of scheduled oilfield maintenance.
“Non-Opec supply annual growth has swung from 2.2 million barrels per day (bpd) at the start of the year to 400,000 bpd in November,” said Amrita Sen, an analyst at Energy Aspects in Singapore. “But the crux of the current oversupply is Opec, with output still running higher by 1.5 million bpd annually.”
However, she added, “with large planned upstream works in the UAE, Qatar and Saudi Arabia in the first quarter of next year, Opec output could fall back to 31 million bpd, helping to offset weakness in crude demand”.
But the latest news has not been supportive. Saudi Arabia produced 10.28 million bpd in October, up from 10.23 million bpd in September, while its exports rose to 7.36 million bpd from 7.11 million bpd, the highest since the middle of the year, according to figures released last week by the Joint Organisations Data Initiative, a multi-government group considered to be a relatively independent and accurate source.
The strength of the dollar after last week’s first post-financial-crisis interest rate increase by the US Federal Reserve also has not helped, as oil, like most commodities, is priced in dollars.
In addition, the lifting last week of restrictions on US crude oil exports that had remained in place for more than 40 years has generally been taken as a bearish development, though its actual impact on international supply is not expected to be significant.
The US still imports a large portion of its oil needs, as Jay Hauck, head of The Crude Coalition, which lobbied for a group of refiners and consumers against the move, pointed out.
“The reality is that the US still imports 7 million barrels of oil per day to meet domestic demand, so for every barrel that is exported a barrel will have to be imported, potentially from an unstable source,” said Mr Hauck. “No other country in the world exports oil while still importing to meet domestic needs.”
Other bearish news from the US came in the form of the latest rig count report from Baker Hughes at the end of the week, which showed rigs in use rising for the first time in four weeks.
Oil production in the US has been unpredictable this year, having peaked at about 9.6 million bpd in the spring as low oil prices halted the sharp rate of increase during which output had nearly doubled since 2010.
Production stabilised at about 9.3 million bpd and then drifted higher during the summer, but the US government’s Energy Information Agency in its latest forecasts said it expected US output to fall next year to 8.8 million bpd and remain under pressure until oil prices recover.
Whatever the medium-term picture, there is widespread agreement that the supply-demand fundamentals remain bleak in the near term. Even the weather in the northern hemisphere is not helping, with unseasonable warmth meaning that demand for “middle distillates” – which includes heating oil – is below trend.
“Ultimately, [refinery] run cuts will be needed to balance distillates, which will weigh back on crude,” said Ms Sen.
In the meantime, the inventories of crude and refined oil products in storage continues to rise.
amcauley@thenational.ae
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