Oil prices slip again as inventories continue to build up

Global oil supply in February was an estimated 94 million barrels per day, up 1.3 million bpd year on year. Hasan Jamali / AP Photo

Oil prices look set to remain under pressure as supply chugs along while inventories in major economies continue their relentless rise.

The steepest decline so far this year was registered in the past week, with world benchmark North Sea Brent crude falling by more than 4 per cent on Friday alone to end at US$54.67 per barrel, reversing some of the gains of nearly 20 per cent made during the recovery in January and February, when Brent pushed above $60.

Yesterday, Ibrahim Al Muhanna, a former spokesman for Ali Al Naimi, Saudi Arabia's oil minister, and still an adviser to the ministry, offered some soothing words about the outlook for oil prices. Speaking in Doha, Qatar, he said that "demand is and will be stronger" and suggested that "Saudi Arabia has never been in a price war with anyone".

That is not the perception of the market, however. Just over a week ago, Mohsen Qamsari, the head of international affairs at the National Iranian Oil Company, said that “the Islamic Republic is set to inject more oil into the world market in an attempt to raise market share”, according to Iran’s state Fars News Agency.

Saudi Arabia and Iran – and other suppliers from the Arabian Gulf – have been competing fiercely for market share and lowering their prices for Chinese, Indian and other major customers in Asia, since last summer.

Last month, Irna, another official Iranian news agency, quoted Seyyid Muhsin Kemseri, Iranian National Petrol Company international relations director, as saying of Saudi Arabia’s deep discounting for Asian customers: “There is extremely fierce competition in the market and if we were in Saudi Arabia’s shoes, we would have done the same”.

In its latest monthly market report on Friday, the International Energy Agency (IEA), the rich countries' main energy think tank, warned: "Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly".

Demand has recovered over the past year but has been outstripped by supply, the IEA reported.

Global supply in February was an estimated 94 million barrels per day, up 1.3 million bpd year on year, with almost all the extra supply coming from North America. Declines in the number of oil rigs operated in the US “have yet to dent North American output growth”, according to the IEA, which added that the sector’s resilience even in the face of lower oil prices meant it would be raising its forecast for North American output for this year.

Higher output from Saudi Arabia, Iran and Angola offset some losses from troubled Libya and Iraq, which meant that overall output from Opec was little changed last month at just more than 30 million bpd.

The IEA said that oil refineries are starting to increase their run rates after a period of maintenance, which should help to slow the rate of inventory building over the next few weeks. But it added that “stocks may soon test storage capacity limits [and] that would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive”.

The think tank does not expect relief any time soon from demand, concluding: “There are still few firm signs at this stage that lower prices are giving the economy a real boost”.

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