Crude Oil price under pressure as supply worries persist
London (Nov 23) Oil prices dropped on Monday, with U.S. crude falling as much as 3% overnight, as a stronger U.S. dollar and persistent worries about the global surplus of crude continued.
Other dollar-priced commodities, from copper HGZ5, -1.73% to gold GCZ5, -0.54% , also fell. The Wall Street Journal Dollar Index BUXX, +0.30% , which tracks the greenback against a basket of other currencies, rose 0.4% on Monday, as anticipation continues to mount that the U.S. Federal Reserve will raise the interest rates in December.
“Oil prices and the USD strength have an inverse relationship and if the USD does strengthen more, oil prices should be taking a hit,” said Daniel Ang, analyst at Phillip Futures.
Brent crude LCOF6, +0.58% , the global oil benchmark, reversed a loss of around 2% to rrade flat at $44.88 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures CLF6, -0.19% pared losses traded down 32 cents, or 0.7%, at $41.63 a barrel.
Market participants remain nervous that major oil suppliers, particularly those in the Organization of the Petroleum Exporting Countries, will continue to ramp up output despite low prices in a bid to secure market share.
The 12-nation oil cartel is scheduled to meet on Dec. 4 in Vienna, but few in the market expect OPEC to deviate from its strategy.
“OPEC… made the call that, to avoid terminal decline in their businesses, they needed to fight back, supermarket style, to regain market share and in due course pricing power,” said David Hufton of London-based PVM brokerage. “The jury is out on whether they have made the right call.”
While OPEC keeps pumping crude at a high pace, U.S. production has started to tail off. Output peaked at 9.6 million barrels a day in April and has fallen to below 9.2 million barrels a day.
However, with weaker seasonal demand due to the refinery maintenance season, oil stockpiles in the U.S. continue to grow and are at levels that haven’t been seen at this time of year for at least 80 years, according to the U.S. Energy Information Administration.
Adding to the concerns about the global glut of crude is the expected return of Iranian oil to the market after the international sanctions against Tehran are lifted in the coming months. Analysts say Iran could ramp up production by about 500,000 barrels a day.
“The problem for the oil market is that although [falling U.S. output] has contributed to a narrowing of the statistical surplus of oil supply over demand, there has been no discernible slowdown yet in the pace of inventory accumulation,” analysts at Barclays said in a report.
The bank sees Brent crude averaging $63 a barrel next year, up from $56 this year. It sees West Texas Intermediate at $59 a barrel, up from $51 a barrel in 2015.
Nymex reformulated gasoline blendstock for December RBZ5, +0.64% — the benchmark gasoline contract — rose 1.4% to $1.30 a gallon.