ECM: Oil Futures under Pressure as Oversupply Fears Return
Fears that oil prices had become detached from the reality of supply issues gained additional traction following the latest US inventories data and put renewed downward pressure on prices.
Crude prices recovered some ground into Wednesday’s inventories data with a covering of short positions, although gains were limited by a generally firm US dollar trend.
The latest US Energy Information Administration (EIA) inventories data recorded a build of 2.5mn barrels in the latest week compared with expectations of a small draw. Stocks were boosted by higher imports and a cut in refinery activity.
Gasoline inventories were unchanged on the week, while distillates stocks rose by 0.1mn barrels. Both gasoline and distillate inventories remain well above historical averages for this time of year, and the data was much less impressive than the API estimate of a substantial gasoline draw.
US crude production declined over the week to 8.548mn bpd from 8.597mn previously following the significant increase seen last week, which will tend to lessen immediate concerns surrounding excess supply with output down from 9.340mn bpd last year.
Markets were braced for a potential rise in inventories following the API data on Tuesday, but the significant weekly build was still important in putting downward pressure on prices as underlying oversupply concerns moved back into focus. WTI immediately dipped back below the $47.00 p/b level with lows fractionally below $46.50 before a limited rally into the US close.
There were indications from Iraq that it is still looking to raise production levels, dampening expectations that OPEC would be able to curb output.
The dollar index edged slightly lower on Thursday, although it regained some ground ahead of the US open, stifling oil support.
Oil prices came under further selling pressure during the European session on Thursday with September WTI futures sliding to re-test support just below the $46.50 level.
Markets overall will tend to be in a consolidation phase ahead of Fed Chair Yellen’s speech on Friday, although crude volatility has been notably high this week, in contrast to currency and bond markets. Any dollar gains ahead of Yellen would tend to put downward pressure on the energy complex.