Gravity pulls down oil prices again

London: Just as the oil market appeared to be stabilising, the price of crude resumed its descent Friday. The drop, of about 4 per cent, came after a report from the International Energy Agency warning that oil pouring into tank farms in the US might “soon test storage capacity limits.”

The agency, whose reports are closely monitored by oil traders, said overflowing storage “would inevitably lead to renewed price weakness”. US production of oil continues to increase despite recently announced cutbacks in new drilling by producers.

The price of West Texas Intermediate, the American benchmark, fell to around $45 a barrel on Friday, while Brent, the international benchmark, fell below $55 a barrel. The Energy Department has proposed adding 5 million barrels of oil to the Strategic Petroleum Reserve. The purchase, which requires congressional approval, would be added in June and July.

But 9.4 million barrels of oil a day are being produced in the US. Kevin Book, an analyst with ClearView Energy Partners, said the proposed purchase was not an attempt to support falling prices but instead “appears to derive from a statutory obligation”.

Richard Mallinson, an analyst at Energy Aspects, a London-based research firm, said that with winter coming to an end in much of the world, the oil market was most likely due for a spell of softness. Refineries in Europe and Asia will now be undergoing routine maintenance, leading to a period of weaker demand for crude. “We are expecting another period of weakness,” Mallinson said.

Additionally, striking refinery workers in the US have reached a tentative deal to end their walkout. Although the walkout affected 12 refineries, it had minimal impact on production as managers and other workers kept the plants running.

While prices rose to more than $60 a barrel for Brent recently, the fundamentals in the market had not changed greatly since oil prices hit multi-year lows in the early part of this year, the agency said in its report. The supply of oil from the US, which has increased production by more than 4 million barrels a day since 2009 — more than the total output of either Iraq or Iran — shows little sign of slowing down, the agency said.

At the same time, Russian exports have been rising, and Saudi Arabia, the third of the world oil production leaders, increased output slightly in January and February. The Saudis under King Salman, who succeeded his brother Abdullah in January, are not showing any signs of readiness to abandon their policy of maintaining production and defending their share of the market regardless of the consequences for prices.

Those low prices have helped lift demand for oil to higher levels than forecasters expected in places like India, Brazil and Indonesia. Even China, whose economy is widely reported to be slowing, is still lapping up lots of crude. Overall demand, which is up more than 1 million barrels a day over last year, according to Energy Aspects, has trimmed expected inventory builds outside of the US.

Stronger-than-expected global demand helps explain the wider-than-usual gap in pricing between Brent, which is used as a reference in much of the globe, and WTI. With operators in the US largely barred from exporting crude, the surplus barrels have nowhere to go, and inventories have risen to near record levels.

The price snapback did not materialise out of thin air. It was aided by the frigid weather in northeast US, which raised demand for heating oil, and other factors like flows into commodity investment funds.

Still, seasoned traders were taken by surprise by the roughly 30 per cent rise in Brent prices to more than $60 a barrel since the six-year lows in January. When oil was scraping bottom, for instance, trading companies like Trafigura Beheer booked fleets of tankers to use as storage to take advantage of the steep spread between current prices for crude and those further out. With current prices having risen sharply, the trading companies have returned most of those ships to normal duties.

But now the mood is turning. “These props to the market are now starting to buckle,” analysts at Citigroup wrote in a recent note to clients. If the US and other global powers manage to reach a deal with Iran over its nuclear programme, for instance, that could clear the way for a big surge in Iranian production.

Iraqi production, which was disrupted by weather in February, has also come back. Exports from the UAE and Kuwait are also running strong, analysts say, aided by aggressive discounting of their crude.

“There is so much oil out there, and it looks like it is going to build up some more,” said Michael Lynch, president of Strategic Energy and Economic Research, a market analysis firm.