Crude Falls to August Lows - Oversupply Concerns Pervade
The front-month contract for WTI settled on the NYMEX at $42.93/bbl, down about 3 percent Wednesday; Brent on the ICE, settled at $45.81/bbl. Oil prices dropped to 2 ½ month lows mainly on global oversupply concerns. Oil prices had settled higher Tuesday after the International Energy Agency (IEA) stated in its annual World Energy Outlook that recent (and forecasted) under-investment in oil projects could lead to $80 oil by 2020, since supply would not adequately meet demand growth. Positive momentum for oil was short-lived, however, when the American Petroleum Institute (API) released after Tuesday’s market close its weekly estimates for U.S. crude inventories showing a large increase of 6.3 million barrels, versus analyst expectations of a build of just 1.1 million barrels.
Weak economic data from China also played into demand concerns, also weighing on oil prices. China reported Wednesday that industrial production slowed to 5.6 percent year over year in October, down from September’s 5.7 percent growth rate, and below analyst expectations for growth of 5.8 percent. Traders were also concerned by reports from one data provider that during the month of October, the United States saw a large uptick (+18 percent) in imports from OPEC countries (namely, Iraq, Kuwait, Saudi Arabia, and the UAE) over the month of September, signaling that these exporters could afford to drop prices in a market where it had recently seen its market share erode.
The closely watched Energy Information Agency’s (EIA) Weekly Petroleum Status report will be issued a day later than the scheduled Nov. 12 due to the Nov. 11 federal holiday. With the market preoccupied with the global glut in oil, traders will be looking for signs of any easing of the growing storage levels across the United States, and especially at Cushing, OK – the delivery point for the WTI contract. While refineries have continued their seasonal maintenance period, crude inventory levels have hit 80-year highs, according to the EIA, and crude stocks have increased for six consecutive weeks. Later this week, oil markets will be evaluating data from the IEA’s monthly Oil Market Report (to be released Nov. 13) and from OPEC in its Monthly Oil Market Report (to be released Nov. 12).
The EIA issued its monthly Short Term Outlook Report Nov. 10, leaving unchanged its oil price forecasts for 2015, and lowering its expectations for 2016. The EIA expects WTI to average $50/bbl in 2015 and $51/bbl in 2016; Brent at $54/bbl in 2015, and $56/bbl in 2016. After U.S. oil output hit a high of 9.6 million barrels per day (bpd) in April 2015, the EIA estimated that production in October fell by 40,000 bpd compared to September. Although the agency forecasts U.S. production to continue falling off through the third quarter of 2016 (to an average of 8.8 million b/d for the full-year 2016), the reduction in supply should not be enough to offset increasing supply from OPEC countries (including the possible return of Iranian crude as soon as January 2016), and from non-OPEC countries, such as Russia.
Following the upcoming Dec. 4 OPEC meeting in Vienna, many market watchers do not anticipate any deviation from the 12-member cartel’s strategy to grow market share (chiefly Saudi Arabia). Over the last year, OPEC has heatedly fought and grown its market share among Asian crude buyers. There is now evidence pointing to OPEC backing out Russian supply in Europe by lowering input prices with European refinery customers.
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