Brent loses ground below $112 on oversupply worries

NDTV Profit Desk

21 Jan 2013, 01:52 PM IST

Brent futures lost ground on Monday after a three-day rally last week, dropping further below $112 per barrel as economic worries and concerns of oversupply offset fears of unrest in the Middle East.

The International Energy Agency (IEA), which advises industrial nations on energy policy, has said the market is tighter than expected but that it is too early to declare a return to the bull market. Analysts seemed to agree more with an assessment by the Organization of the Petroleum Exporting Countries (OPEC) that the supply is greater than demand.

"The IEA may have said the market is tighter, but the over-riding fundamental feeling in the market is that crude oil is over supplied in 2013," said Tony Nunan, an oil risk manager at Mitsubishi in Tokyo.

Front-month Brent slipped 32 cents to $111.57 per barrel by 0706 GMT. US crude shed 46 cents to $95.10 per barrel after touching a four-month high last week. Brent may trade in a range between $109-$112 per barrel this week, Mr Nunan said US markets are closed on Monday for a holiday.

LESS DEMAND, MORE SUPPLY?
Worries on the global economy and impact on fuel demand were renewed after US consumer sentiment dropped to the lowest in a year in January, as a result of the uncertainty surrounding the country's debt crisis. That added to concern of weakness in the euro zone as well as sluggish growth in Japan's economy.

Demand worries were accentuated by OPEC's report last week that indicated that oil supply will comfortably outstrip demand in the first half of 2013, even after an output cut by Saudi Arabia late last year.

The IEA said a rebound in China's demand and Saudi's production cut may tighten the market, but added it was too soon to be concerned about that.

The US Energy Information Administration (EIA) said earlier this month that it expects US crude production to rise by the largest amount on record in 2013. "This confirms our view that the upward bias to US supply growth makes it a new source of uncertainty," Deutsche Bank analysts said in a report.

MIDDLE EAST UNREST
Unrest in the Middle East, the world's biggest source of crude supply, supported prices. World attention last week was focussed on militant attack on an Algerian gas field, which claimed 80 lives of Western hostages and militants.

Around 30 foreigners - including American, British, French, Japanese, Norwegian and Romanian citizens - are among those missing or confirmed dead after one of the worst international hostage crises in decades.

"The crisis underscores the fact that the Middle East is no safer now," said Mr Nunan. "There are huge facilities that could be targets, although on the positive side, it could lead to a beef-up in security."

Late last week, Libya rushed to beef up security at its oil fields and energy firms were considering similar measures in Egypt as militants threatened to attack new installations in North Africa.