Thursday 20 October 2016

Oil extends losing streak as oversupply concerns persist

Published 15/12/2015 | 07:25

Oil prices have continued a downward slide
Oil prices have continued a downward slide

Oil prices dipped on Tuesday, with Brent set to extend its losing streak to an eighth day, as investors remain concerned about a global glut and mild winter demand that sent prices close to 11-year lows during the previous session.

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Brent LCOc1, the global benchmark, was at $37.74 at 0440 GMT, down 18 cents from its last settlement after rising slightly earlier on Tuesday.

The contract on Monday bottomed out at $36.33 a barrel, only a few cents above the $36.20 low last seen during the 2008 financial crisis. Falling below that level would take Brent to prices not seen since the middle of 2004.

Bearish sentiment remains strong, fueled by an OPEC decision earlier in December to abandon setting a production ceiling for the oil cartel and a likely rise in Iranian supplies after sanctions are lifted.

With OPEC flooding international markets while U.S. drillers keep producing large amounts of crude, the Brent/WTI premium has halved over the last week to around $1.50 per barrel. That's the narrowest spread between the two benchmarks since January.

Traders said that the low prices were a combination of structural oversupply and seasonal price weakness. "The weather is very mild with reduced demand for heating oil," said Oystein Berentsen, managing director of crude oil at Strong Petroleum. Oil markets usually see strong demand towards year's end as the northern hemisphere enters its peak winter heating demand season. Yet an unusually mild start to winter, in part due to the El Nino weather phenomenon, has limited heating demand.

In the next two weeks, Japan, South Korea and Russia will see milder than normal temperatures while the U.S., Canada and Europe will be "particularly" mild, according to a note from BNP Paribas. This seasonal weakness is compounding a structural oversupply as 0.5 million to 2 million barrels of crude per day (bpd) is produced in excess of demand. "Land storage capacity is now limited but OPEC keeps increasing production so the oil price is relentlessly trending down. Short-term further pressure can be expected. Iran may return to the market in January which is causing concern of increasing oversupply," said Berentsen.

Also looming large is the likely increase in US interest rates this week. Crude, priced in US dollars, typically falls as the dollar strengthens since it becomes more expensive for buyers paying in other currencies.

Yet there are analysts who say that the oversupply may be overrated.

"The oil market remains more tightly balanced than is reflected in today's low prices. The oversupply is about 1.5pc of a 95 million bpd market with limited spare capacity in a risky political setting for weak petro states prone to disruption," Citibank said.


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