Oil prices fall on rising US rig count, slowing Asian demand

Oil prices fell on Monday amidst factors like increasing output from US producers and slowing demand from Asian refineries, analysts told Argaam.

Brent crude traded at $46.30 per barrel, down about 50 cents from its last settlement, while West Texas Intermediate (WTI) crude dropped by 57 cents to $44.96 a barrel.

The decline on Monday followed a slump in prices over the past week caused mainly due to factors from both the US and Asia, said Shoaib Abedi, director at UK-based ICM Capital.

“The fundamental outlook is bearish and the latest development is US oil drillers are adopting lower prices,” he noted. 

Ole Hansen, head of commodity strategy at Denmark-based Saxo Bank, echoed the view that US drillers are adjusting to low prices, adding that “the breakeven level for some of the most efficient US oil producers has fallen to $50 from around the $60 level where oil peaked last June.”

The number of oil rigs being operated in the US has also been on the rise, increasing by 10 last week to 351, with new rigs being added in five out of the last six weeks, Hansen added.

Moreover, gasoline inventory levels remain “stubbornly high” even as the peak driving season in the US comes to an end, he pointed out, noting that this raises concerns about refinery demand going forward.

“Likewise in Asia, very strong demand from Chinese refineries during the past six months is showing signs of slowing with gasoline inventories building up as refinery margins come under pressure,” Hansen said.

Abedi also noted that a slowdown of crude demand from Asia is imminent.

“The Asian refiners crude run trimming may persist for a while taking into consideration the development in the global economy, which hurts Asian economies.”

Moreover, output from Canada, Nigeria and even Libya – all of which have been hit by supply outages – is potentially seen returning to the market, Hansen added.

“These additional barrels will hit a relative weak and still oversupplied market.”

Ehsan Ul Haq, principal consultant at UK-based consultancy KBC, also raised concerns of a crude oversupply, which is spreading to the refining sectors.

“Gasoline stocks have risen to unprecedented levels, while there is a huge uncertainty in financial markets following Brexit, which could persist for several months,” he told Argaam.

However, despite the current downward spiral in prices, oil oversupply is gradually easing as non-OPEC output – especially in the US– declines at a rapid pace, he said.

“This could move prices to more than $50 per barrel by the end of the year,” Ul Haq.

Hansen agreed that oil prices could pick up over the year, despite remaining depressed in the short term.

“The oil market is now much more balanced than at this time last year so I do not see any major sell-off from here. Over the coming month Brent crude oil could fall as low as $43 but we maintain the view that such level would help speed up the rebalancing by delaying any further progress among US high cost producers.”

Write to Jerusha Sequeira at jerusha.s@argaamnews.com