Thursday 27 October 2016

Oil drops back under $30 a barrel as oversupply worries return

Meeyoung Cho

Published 26/01/2016 | 08:10

A North Sea oil rig
A North Sea oil rig

Crude futures fell on Tuesday, dropping below $30 a barrel and extending the previous day's losses by more than 3pc, as worries about oversupply by top producers combined with more signs of a Chinese economic slowdown to spook the market.

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China's rail freight volume, a key economic indicator, dropped 11.9pc in 2015 from a year ago, compared with a decline of 3.9pc in 2014, the National Development and Reform Commission said on Tuesday, adding to concerns of contracting economic activity and weighing on oil prices.

Global benchmark Brent crude lost $1, or 3.3pc, to $29.50 a barrel by early morning after hitting a session low at $29.35 a barrel. It settled down $1.68 at $30.50 in the previous session, 5.2pc below its closing price on Friday.

US crude fell 93 cents, or 3.1pc, to $29.41 a barrel, after hitting a session low at $29.39. It fell $1.85, or 5.8pc, to $30.34 a day earlier.

"Technical short-covering and a cold spell in the United States and some parts of the northern hemisphere had helped prices rally temporarily, most of which was wiped out if you look at yesterday's prices," said Kang Yoo-jin, a commodities analyst at NH Investment and Securities based in Seoul.

"Psychological factors have driven the severe volatility in the market," added Kang, who said the situation was likely to persist until concerns over oversupply were lifted.

Meanwhile, Iraq may raise output further this year, reaching levels as high as four million barrels per day (bpd) from the country's south, a senior Iraqi oil official said. Current production has been around 3.7-3.8 million bpd.

At the same time, national oil giant Saudi Aramco is continuing to invest in oil and gas production capacity despite cost-cutting due to low prices, its chairman said on Monday.

All the new production may mean low oil prices could stay for a longer time, Kuwait Petroleum Corp Chief Executive Officer Nizar al-Adsani said on Tuesday.

Investors are closely watching the Federal Reserve meetings starting on Tuesday for the first time since raising interest rates in December. While no move is expected, investors will scrutinise the statement to see how recent events have influenced the central bank's outlook.

"The weakening of the global economy is weighing down not only on the U.S. Federal Reserve, but also the ECB who are planning to act in March. This also means that the USD may not maintain strong after the meeting which may give some support for oil prices," Daniel Ang at Phillip Futures said.

In the United States, commercial crude and gasoline inventories probably rose last week, while distillate stocks likely fell, a preliminary Reuters survey showed.


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