Abu Dhabi: Oil prices are unlikely to recover in the near term as production continues to rise and demand slows down across the globe.
Crude oil in the United States fell below $40 (Dh147) per barrel on Friday, the lowest since 2009. It recovered later to close at $40.45. International benchmark brent was at $45.46, down by 2.49 per cent.
According to analysts, the very near term outlook for oil prices is not good.
“There is a reasonable risk that in the coming weeks the West Texas oil price will fall into the thirties, brent maybe as low as $40 (per barrel),” said Gary Dugan, Chief Investment Officer at National Bank of Abu Dhabi.
“August/September is a seasonally weaker period for the demand for oil due to run down of inventories after the US driving season, and usual refinery outages for annual maintenance. “
He said many of the Opec (Organisation of Petroleum Exporting Countries) members continue to overproduce in an attempt to maintain revenues when the price of oil is down.
“Also US production has not fallen away as quickly as some had hoped or expected.”
Data released by US driller Baker Hughes last week said that oil-rig count increased by two to 674, marking the fifth consecutive week of increases.
Despite a significant reduction of investments by oil companies, production in the US has remained almost stable due to increased efficiency in the production process.
Opec held meetings in November 2014 and June 2015 where it decided to maintain its level of production in order to keep its market share which has led to the price of oil dropping by more than 50 per cent. The demand from China, one of the largest consumers of oil has been slowing due to weak economic growth.
Dugan said the medium term picture for oil will depend on the state of global growth, and the discipline that can be brought to bear on the suppliers of oil, in particular the US and Opec.
“The growth of demand for oil has been relatively good so far this year, with year on year growth of 1.6 million barrels a day. For sure the hesitant pace of global growth and the problems in China have led to downgrades to oil demand, but still demand could be characterised as robust.”
Francisco Quintana, Head of Economic Research at Asiya Investments expected markets to stabilise at or above 50.
“We might see the 40s, but economic fundamentals are not that weak and prices will go back up,” he said.
“Global growth decelerated in Q2 and Q3 but only mildly. Markets seem disoriented. They do not know how to interpret what is going on China. Both the decline in stocks in July and the recent depreciation have confused investors,” he added.
Oil prices have been witnessing downward trend since June 2014. From a peak of $115 per barrel, global oil prices slid to around $45 last week as the demand decreases and oil production increases. Both Opec and US shale producers continue to pump in to retain their market share.
Entry of Iranian oil could put further pressure on oil prices as the Islamic Republic gets ready to after reaching an agreement with six major world powers in July.
Iran Oil Minister Bijan Namdar Zanganeh earlier this month said the country can increase oil production by 500,000 barrels a day in a week after sanctions end and by 1 million barrels a day in one month.