Oil prices are showing signs of sustained weakness amid an economic slowdown in China, a rising US dollar, and the prospect of additional crude supplies from Iran in the coming months.
Benchmark North Sea Brent crude fell US$1.10 a barrel to $51.11, having lost more than $9 in the past month.
Brent prices had been relatively stable from March to June at just above $60 a barrel after last year’s slide from $145 to as low as $45 this year.
But analysts now expect another period of price weakness until a recovery in major economies can lift demand sufficiently to soak up the extra supply that has been weighing on the market for more than a year, as major oil producers have opted to fight for market share rather than curtail production.
“The much feared double-dip is here,” said Sabine Schels, a commodity strategist at Bank of America Merrill Lynch.
In the near term, a seasonal slowdown in demand because of refinery maintenance in Asia is expected to lead to further price declines.
Although temporary shortages in the refining sector contributed to the unexpectedly firmer oil prices early this year, chronic refining overcapacity is likely to pressure prices for some time, according to Christopher Haines, a senior oil analyst at BMI Research in London.
“Soft refined fuels demand, despite weaker crude oil prices, and new refining capacity additions will sustain refining overcapacity until 2019,” he said. “This is largely the result of the Yas refinery in Saudi Arabia and the Ruwais refinery in the UAE, which combined will add over 800,000 barrels per day (bpd) of new fuels production capacity in 2015.”
There is no sign yet that Saudi Arabia is prepared to lead an effort to curb supply – rather it is sticking with a policy of letting the market balance itself.
Indeed, according to Ms Schels: “Opec has given up on its traditional role of keeping supply and demand in check. The cartel is now effectively dissolved [and] the consequences of this shift in Opec policy are profound and long lasting.”
Saudi Arabia has been producing at record levels this year, as has its close Arabian Gulf allies, including the UAE.
Iraq is boosting output as much as it can, constrained only by security and technical factors, and on Sunday Iran’s oil minister reiterated that it was Tehran’s intention to recapture market share as soon as it can after sanctions are lifted.
Yesterday, Oman, which is not an Opec member, said it produced 992,700 bpd in June, at record level, according to reports.
The one bright spot has been curtailed production of shale oil in the US, where the market is more directly responsive to prices.
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