An oil pump jack is seen at sunset near Midland, Texas, U.S. A drop in US oil inventories are expected to provide oil prices with a short-term boost. Image Credit: Reuters

Abu Dhabi: A drop in US oil inventories will provide oil prices with a short-term boost, though market factors on demand and oversupply will remain an issue in the longer term, analysts said.

The US Energy Information Administration (EIA) last week reported that US oil inventories were down by 1.7 million barrels compared to the previous week. The drawdown saw oil prices closing on a monthly high, with Brent trading at $62.02 and West Texas Intermediate (WTI) on $56.66.

“The market has found support from a surprise drop in US crude stocks and expectations for a robust refinery activity to meet increased shipping demand for low sulphur fuel before IMO20 regulations begins next year,” said Ole S. Hanson, head of commodity strategy, Saxo Bank.

“While the short-term outlook has improved, the 2020 outlook remains challenging with the International Energy Agency looking for non-Opec supply to exceed demand, thereby putting pressure on the Opec+ group to cut even deeper,” he added, highlighting the challenges that remain in the oil market.

Reports last week said that further production cuts by Opec+ could be in the offing later this year, something Hanson said would likely need to be carried out to ensure prices don’t drop. “How to address this price suppressing gap between supply and demand in 2020 is likely to be a major market focus ahead of the Opec+ group meeting in Vienna on December 6.

“At a time of slowing global growth and with that demand for oil, the group will find itself in a position of having to cut deeper or let the price drop further in order to force an accelerated slowdown in US production growth,” he added.

“We maintain the view from our fourth quarter outlook that Brent crude oil is likely to remain range bound around $60 [per barrel] ahead of the year-end,” Hanson said, predicting that prices would stay at the $60 range.

US-China trade deal

Oil prices could be further boosted this week on the news of a possible US-China phase one-trade deal. On Friday, The US Trade Representative’s office in a statement said that both sides were close to finalising a deal.

The trade dispute between the world’s two largest economies has seen tit-for-tat tariffs worth billions of dollars placed on imported products from both countries, downgrading world economic forecasts as a result of the trade war and dampening oil demand.

UAE oil production

In its quarterly Mena report released on Sunday, Emirates NBD reported a 2.8 per cent increase in the UAE’s output production while also keeping to its Opec+ production cut.

“The UAE’s crude oil output has been steady around 3.07 million bpd for most of this year, which is nearly 3 per cent more than the average production in 2018.

“The positive contribution of the oil sector to GDP growth in the UAE is in stark contrast to most of the other GCC countries, where production has declined this year,” the report added.

“Overall, we remain comfortable with our 2.0 per cent real GDP growth forecast for the UAE this year, underpinned by growth in the oil sector as well as expansion in Dubai’s largely non-oil economy,” the report said.