Oil slips amid signs of US inventory build-up

Opec+ is expected to ease historic cuts from the beginning of August and will convene its joint ministerial monitoring committee on July 15

The US government stepped in to help the industry at a time when US benchmark, West Texas Intermediate, collapsed below zero to trade at -$40 per barrel. Bloomberg
The US government stepped in to help the industry at a time when US benchmark, West Texas Intermediate, collapsed below zero to trade at -$40 per barrel. Bloomberg

Oil prices eased amid signs of an inventory build-up in US, with stockpiles at a key delivery point rising for the first time in two months.

About 2.05 million barrels of inventories were added last week, according to the industry-funded American Petroleum Institute. Oil stocks at Cushing, which is the main delivery point for West Texas Intermediate, the key US benchmark, rose for the first time since May.

Brent, the international benchmark, was down 0.35 per cent at $42.93 per barrel, while WTI slipped 0.44 per cent to trade at $40.44 per barrel at 12.21pm UAE time.

A build-up of inventories at landlocked Cushing is of concern as a near saturation of the storage facilities in April led WTI plunging below zero to trade briefly at -$40 per barrel.

The US is the country most affected by the coronavirus pandemic, with the number of cases moving past 3 million on Wednesday, according to the Johns Hopkins University tracker. The country also has the most number of deaths from the pandemic, with the current toll at 131,480.

The rising number of cases has prompted several US states such as Texas to reimpose lockdown measures, hurting demand for crude as a result of mobility restrictions.

Softening demand and an abundance of supply "could trigger a downside correction" in prices to the region of $38/35 per barrel, according to Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

"WTI crude sees fading appetite near the $40 per barrel as prospects of post-Covid recovery are being dashed by the rising number of new cases, as the API data hints at a surprise build in US oil inventories last week," Ms Ozkardeskaya said.

On Wednesday, Emirates NBD, Dubai's largest lender, raised its forecasts for oil prices, anticipating the Brent and WTI to average $42.55 per barrel and $37.7 per barrel, respectively, in 2020. The benchmarks should trend higher in 2021, but the levels will remain "muted", the bank said in a note on Wednesday.

Demand is expected to recover during the rest of the year, registering a growth of more than 13 million barrels per day in the third quarter and gaining an additional 2m bpd in the last quarter of 2020. Demand fell more than 12m bpd in the second quarter.

"As economic recovery takes hold in many markets oil demand will track alongside it, although the gains across geographies and products are unlikely to be evenly distributed," said Edward Bell, senior director, market economics at Emirates NBD.

The demand crunch has been cited as the worst on record by the International Energy Agency. To counter it, the Opec+ alliance led by its biggest producers Saudi Arabia and Russia, is cutting back supply until the end of the month.

The group, which is expected to ease the 9.7m bpd from August 1, will convene its joint ministerial monitoring committee on July 15.

Laggards such as Angola are said to have submitted proposals to make additional cuts to make up for overproduction earlier this year.

Opec+ will gradually increase production from August 1. Production restrictions will remain in place in a tapered manner until April 2022.

"For Opec+ going forward the challenge will be maintaining compliance so that any additional production does not overwhelm the tentative recovery in consumption," Mr Bell said.

Updated: July 8, 2020 03:59 PM

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