Oil Prices Fall as Supply Glut Concerns Persist

By Matthew Cowley 

LONDON--Crude oil prices were lower on Friday morning in Europe amid some skepticism that production will shift to a lower gear and reduce the global oil glut.

The world's main energy agencies in recent days have said production in the U.S. is showing signs of falling. The Organization of the Petroleum Exporting Countries said U.S. output would decline in the third quarter, while the U.S. Energy Information Administration released data showing the second drop in weekly oil production in three weeks.

Prices surged to a fresh high for the year on Thursday after the OPEC data were released. While some see positive signs in the figures, others believe the oil surplus is set to continue for some time, keeping prices lower.

Brent, the global benchmark, was down 64 cents, or 1%, to $63.34 a barrel on ICE Futures Europe. However, it is still up nearly 12% over the past week.

Light, sweet crude for June delivery was down 59 cents, or 1%, to $56.12 a barrel on the New York Mercantile Exchange, but prices remain 10.5% higher this week.

According to Tamas Varga, the takeaway from the IEA and OPEC data is that even though the oil price has halved over the last 10 months, both groups say that demand for oil produced by OPEC member countries has slipped--which suggests downward pressure on prices.

"All of the above, which already paints a very bearish fundamental picture, assumes of course that there will be no leakage of additional Iranian barrels onto the market as nuclear negotiations continue," said Mr. Varga.

There could be fresh oil on the global market if Iran strikes a deal later this year with the U.S. and its allies over Tehran's nuclear power program, which could see an end to sanctions imposed against the Persian nation.

Others believe there is real momentum behind this week's rally. Phillip Futures says fundamental factors have finally started to change in the crude oil market, with U.S. production stabilizing. "We continue to have a bullish view to the market and believe that both WTI and Brent should end the week above $57.5 and $64.42 respectively."

That said, it noted there are some worries that could "hinder this uptrend." In particular, the rise in production in Saudi Arabia is a surprise, "as we did not expect Saudi Arabia to default on their oil policies," it says.

Even if oil consumption is on the rise, it is still not enough to offset the overall surplus production around the world, says Bank of America Merrill Lynch. That's a reason to be pessimistic about the recent oil price rise, it says.

"Global oil demand is a bit better than last year, but stocks are still building and the recent run up in prices could lose steam sooner rather than later," said BAML. The bank sees crude WTI prices at end of the second quarter at $41, and Brent at $48. Brent for June delivery is 1.2% lower at $63.21.

While oil consumption is improving in developed markets, including North America and Europe, it is down in emerging markets, particularly due to weaker growth from commodity exporters and a sluggish Chinese economy, said Bank of America. Longer-term, the market needs developing markets to take up the slack, it said.

"A combination of fuel efficiency, substitution, and worsening demographics in developed markets means that improving American or European oil demand can only provide limited support to crude prices," said Bank of America.

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