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Oil Prices Drop as Global Oversupply Outweighs Strong Demand - ASHARQ AL-AWSAT English Archive
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Pump jacks are seen at the Lukoil company owned Imilorskoye oil field, as the sun sets, outside the West Siberian city of Kogalym, Russia, January 25, 2016. REUTERS/Sergei Karpukhin

Pump jacks are seen at the Lukoil company owned Imilorskoye oil field, as the sun sets, outside the West Siberian city of Kogalym, Russia, January 25, 2016. REUTERS/Sergei Karpukhin

U.S. crude hit 2016 highs on Wednesday and Brent bounced back over $40 per barrel, leading to the drop of oil prices on Thursday. Analysts are cautioning that more profit would be unwarranted as a global oversupply continues to outweigh strong demand.

Expectations of more inducement from the European Central Bank (ECB) this week, which would reinforce the dollar against the euro and potentially hamper dollar-traded oil imports, also took a toll on markets.

“The ECB will cut deposit rates by 20 bps (basis points) and extend its bond buying program by one year. This could be bullish for the dollar and bearish for oil,” French bank Societe Generale said.

“Moreover, recent price gains are somewhat tenuous, because they’ve been driven by market sentiment, which can change quickly,” it added.

Brent crude futures were at $40.57 per barrel at 0805 GMT, down 50 cents from their last close.

U.S. crude was down 32 cents at $37.97 per barrel.

The falls came after prices perked up as much as 5 percent on Wednesday, with U.S. crude hitting three-month highs following a big gasoline inventory drawdown, which outdid record-high crude stockpiles.

But analysts warned that a global crude production surpassed one million barrels per day (bpd) and showed few signs of abating.

With U.S. crude inventories at records despite strong demand, the attention lies on an impending agreement between producers from the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, and non-OPEC exporters led by Russia to slow down output.

However, despite all the talks on freezing output levels, no agreement has been reached.

Barclays said there was no talk of a production cut during a research trip to Saudi Arabia and that the country’s goal was to maintain production levels around 10.2 million bpd over the next five years.

Most analysts expect the oil glut to last into 2017 or even 2018, causing in low prices.

Only by 2020 is there a consensus for prices to rise towards $70 a barrel, based on low investment into production.

But this could collide with slowing demand as Deutsche Bank said China might see lower fuel demand growth from the 2020s.

“Chinese oil demand growth, the largest single contributor to world oil demand growth, may begin to flatten more quickly than some long-term projections indicate,” the bank said.

“This could result in world oil demand growth falling from its 2000-2016 trend of 1.1 million bpd year-on-year to only 800,000 bpd … by 2024.”

A slowdown in China’s oil demand would have a momentous impact on crude prices as it has accounted for 37.5 percent of world oil demand growth since 2010.

Asharq Al-Awsat English

Asharq Al-Awsat English

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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