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Oil prices dip on further rise in USA drilling, demand slowdown

20 Juin 2017

US West Texas Intermediate (WTI) crude futures were also down 11c, or 0.25%, at $44.63 a barrel.

Signs of faltering demand have also prompted weakening sentiment, dropping prices to levels comparable to when the output cuts were first announced late a year ago.

Oil prices edged higher on Monday, pausing for breath after coming under pressure over the past month from rising production in the United States, Libya and Nigeria, which has taken the edge off an Opec-led initiative to support the market by cutting production. US inventories fell less than forecast last week, keeping supplies more than 100 million barrels above the five-year average, according to data from the Energy Information Administration on Wednesday. "Continued rig additions in the USA are complicating the picture, raising doubts on Opec's strategy", AB Bernstein said. "Nothing this week has been particularly bullish".

Generally, supply and demand have been the most important considerations.

If Brent continues to trade at below $50 a barrel over the summer, Opec and its partners will be faced with some hard questions about their market intervention.

"The Saudis understand the importance of changing optics in the USA and are following it up by continuing to signal that they are going to reduce shipments into the US", said Helima Croft, global head of commodities strategy at RBC.

Continued production growth in non-OPEC countries, however, is expected to result in a slight inventory build in 2018.

On May 25, OPEC member countries and non-OPEC parties, Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, and the Republic of South Sudan agreed to extend the production adjustments for a further period of nine months, with effect from July 1, 2017. With Brent crude at a seven-month low, can Opec avoid a rebellion?

The latest COT data recorded a decline in net long, non-commercial crude positions to 359,000 contracts in the latest week from 382,500 the previous week and this was the lowest reading for four weeks. Citigroup Inc. analysts including Daoyuan Zhou wrote in a report on Friday that structural changes in the options market are likely a reflection of consumer activity being stepped up.

The weakness of crude timespreads has outpaced the declines in the nearest prices. That reduction of oil into the country could show up as a bullish sign in the US data, and contribute to faster drawdowns in storage. The contract lost 27 cents to $44.46 on Thursday, the lowest since November 14. On Wednesday, when the EIA showed that crude stockpiles fell less than expectations, they also showed that gasoline stockpiles (an indicator of demand for refined oil products) rose to 242.4 million barrels, an increase of 2.1m bbl. Because the Brent benchmark is priced in that region "even if it's a small build, it will have a significant impact on oil prices".

The politically divided country is pumping at its highest level since June 2013, when production reached 1.13 million barrels a day, data compiled by Bloomberg show.

Oil prices dip on further rise in USA drilling, demand slowdown