Crude Prices Fall on Looming Oversupply

Oil dipped on Wednesday, squeezed by lingering oversupply, including rising US inventories and ample physical flows, though the prospect of Saudi output dropping in March, economic growth hopes and a weaker dollar all combined to cap losses. 

US West Texas Intermediate crude futures were at $59.06 a barrel, down 13 cents from their last settlement. WTI was trading above $65 in early February. Brent crude futures were at $62.68 per barrel, down 4 cents. Brent was above $70 a barrel earlier this month, Reuters reported.

The Saudi Energy Ministry said on Wednesday that Saudi Aramco’s crude output in March will be 100,000 barrels per day below its February level while exports would be kept below 7 million bpd. 

Ongoing weakness in the US dollar and economic growth also supported oil markets. Despite this, analysts warned that not all indicators were bullish. 

“While we continue to see a firming fundamental backdrop over the course of this year ... investors should not discount the caution signs that have been emerging,” investment bank RBC Capital Markets said in a note to clients. 

“Pockets of oversupply have been emerging in the physical market,” the Canadian bank said. “The tempering physical oil backdrop is ... playing a central role in the recent price softness.”

The American Petroleum Institute said on Tuesday that US crude inventories rose by 3.9 million barrels in the week to Feb. 9 to reach 422.4 million. 

That was largely due to soaring US crude production, which has jumped by over 20% since mid-2016 to more than 10 million bpd, surpassing that of top exporter Saudi Arabia and coming within reach of Russia, the world’s biggest producer. 

US crude is also increasingly appearing on global markets and more is set to come as the Louisiana Offshore Oil Port starts testing supertankers for exports. 

The surge in US supplies means oil may be in oversupply again soon, flipping the 2017 deficit induced by supply restraint led by the Organization of Petroleum Exporting Countries and Russia. 

“I am confident that our high degree of cooperation and coordination will continue and bring the desired results,” Saudi Arabia’s Energy Minister Khalid al-Falih said on Wednesday. 

Not all agree. The International Energy Agency expects oil demand to grow by 1.4 million bpd in 2018, but adding that output growth could outpace demand. 

Citi said it expected 2018 oil markets to be balanced or in slight oversupply, forecasting a “market surplus of 0 to 0.2 million bpd”. 

OPEC and the IEA “are vastly underestimating the magnitude and sustainability of non-OPEC oil supply growth”, Citi said. 

Markets are already reacting, with physical prices for crudes from the North Sea, Russia, the United States and Middle East becoming cheaper.