BUSINESS Oil prices drop mainly due to higher supply from OPEC, Russia


Oil prices drop mainly due to higher supply from OPEC, Russia


06:46, August 07, 2018

AP photo.jpg

(Photo: AP)

HOUSTON, Aug. 5 (Xinhua) -- The oil prices had a slightly downtrend movement in the week ending Aug. 3, posting a fourth loss in the past five weeks.

The price of the West Texas Intermediate (WTI) for September delivery and Brent for October delivery decreased by 0.75 percent and 2.10 percent, respectively, in the week. At the end of the week, WTI settled at 68.49 US dollars, while Brent settled at 73.21 dollars.

Oil prices started the week with gains due to the focus on supply disruptions and a potential impact of US sanctions on Iranian crude oil output. Meanwhile, the production of Syncrude Canada's offline on its sands facility is impacting the market.

On Monday, WTI for September delivery increased by 1.62 percent and settled at 70.13 dollars a barrel on the New York Mercantile Exchange. Brent crude for October delivery increased by 1.03 percent and steeled at 75.55 dollars per barrel on ICE Futures Europe.

Syncrude Canada, one of the world's largest producers of synthetic crude oil from oil sands and the largest single source producer in Canada, has announced that due to a power outage, the production at its oil sands facility near Fort McMurray, Alberta was offline at least through July.

Syncrude Canada's nameplate capacity stands for roughly 10 percent of the Canadian crude oil supply. Its flow to Cushing, the US state of Oklahoma, has been reduced, which caused extreme low levels in the energy hub inventories.

Cushing is a major trading hub for crude oil and a famous price settlement point for WTI on the New York Mercantile Exchange.

Since beginning of the year, Cushing crude oil inventories have declined by 50 percent.

On Wednesday, the US Energy Information Administration reported a surprise build of 3.8 million barrels in commercial crude oil inventories. The buildup was mainly due to 9.6 million barrels of lower exports for the week ending July 27, compared with the previous weekly report levels. The crude oil imports maintained the same levels during the last two weeks.

US net imports of crude oil is a very important value for the oil price movements. US net imports increased by 1.35 million barrels per day during that week.

Anas Alhajji, an energy economist based in Dallas, Texas, told Xinhua that "Unlike the past, US weekly crude oil inventories have become extremely sensitive to US net imports, making short term oil prices more volatile."

EIA also reported on Wednesday that US oil production declined to 10.9 million barrels per day during the week ending July 27, dropping from its record high level of 11 million barrels per day.

Furthermore, oil prices were dragged down by the increasing output of the Organization of the Petroleum Exporting Countries (OPEC) and Russia. OPEC and Russia reported an increase in their output by 300,000 and 150,000 barrels per day in July, respectively.

Alhajji said "The July production numbers show a large increase in OPEC production close to 300,000 barrels per day, but exports increased only slightly, preventing prices from declining further."

"While the increase in OPEC production raises questions about the size of the remaining production capacity, people should remember that most of the decline in Venezuelan and Iranian production is already priced in."

On Friday, the Houston-based Baker Hughes reported that the number of active drilling rigs in the United States decreased by four to 1,048.

Analysts attributed the decline in drilling rigs to the larger price differential between WTI Midland and WTI Cushing due to pipeline bottlenecks.

While media sources refer to WTI Cushing as US oil prices, however, producers in the Permian region in West Texas generally receive prices on oil closer to the WTI crude priced at Midland, Texas. WTI Midland and WTI Cushing usually trade close to par, but there were several times over the past two years the spread has blown out, sometimes to up to 20 dollars a barrel.

Despite the decline in rig counts, the downward trend in oil prices continued on Friday. The WTI lost 0.47 US dollar to settle at 68.49 dollars a barrel on the New York Mercantile Exchange, while Brent erased 0.24 dollar to close at 73.21 dollars a barrel on the London ICE Futures Exchange. The differential was 4.72 dollars at the end of the week.

The price differential between WTI and Brent narrowed down mainly due to the oversupply worries after OPEC and Russia increased their output together by almost 500,000 barrels per day in July.

The higher differentials between the two major benchmarks are, the more arbitrage opportunities for traders to pursue. As a result, more US crude oil would be shipped to Asian market.

On Friday, US dollar Index reached its highest levels within the last 52 weeks, which was another factor that pressured the oil prices during the recent weeks.

Moreover, the trade disputes between the United States and China have kept dragging down the oil prices. At the same time, the extent of US sanctions on Iranian crude oil exports will also be in the radar of the oil market.

According to analysts, the world is going through a cycle that geopolitics, rather than supply and demand, is dominating the oil market.

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