Supply overhang casts a long shadow over oil prices

Singapore — Oil prices slumped to 2018 lows on Friday in thin but volatile trading, pulled down by concerns of an emerging global supply overhang amid a bleak economic outlook.

Even an expectation that producer cartel Opec will start withholding supply in 2019 to rein in any glut provided little support, traders said.

International benchmark Brent crude oil futures hit their lowest since December 2017 at $61.52 a barrel, before recovering to $62.10 by 4.30am GMT. That was still 50c, or 0.8% below their last close.

US West Texas Intermediate (WTI) crude futures slumped by more than 2%, to $53.35 a barrel, after coming within 5c of an October 2017 low reached earlier in the week.

Amid the plunge, Brent and WTI price volatility has surged in November to approach levels not seen since the market slump of 2014-2016 and, before that, the financial crisis of 2008-2009.

The divergence between US and international crude comes as surging North American supply is clogging the system and depressing prices there, while global markets are somewhat tighter — in part because of reduced exports from Iran due to newly imposed US sanctions.

Overall, however, global oil supply has surged this year, with the top-three producers of the US, Russia and Saudi Arabia pumping out more than a third of global consumption, which stands at about 100-million barrels a day.

High production comes as the demand outlook weakens due to a global economic slowdown.

Oil prices have plunged by about 30% since their last peaks in early October, as global production started to exceed consumption in the fourth quarter of this year, ending a period of undersupply that started in the first quarter of 2017, according to data in Refinitiv Eikon.

Adjusting to lower demand, top crude exporter Saudi Arabia said on Thursday that it may reduce supply.

“We will not sell oil that customers don’t need,” Saudi Energy Minister Khalid al-Falih told reporters.

Saudi Arabia is pushing Opec to cut oil supply by as much as 1.4-million barrels a day to prevent a supply glut.

The group officially meets on December 6 to discuss its supply policy.

US bank Morgan Stanley said it saw “a far greater probability that Opec reaches an agreement to balance the market in 2019” than not, adding that this was likely to support oil prices “in the high-$50s, at least near term”.

Reuters

Source: businesslive.co.za