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Oil Rises 2% But Oversupply Concerns Remain

Oil Rises 2% But Oversupply Concerns Remain

London: Oil rose more than two per cent on Tuesday after falling by around $4 per barrel in one week, but investors remained concerned about oversupply weighing on prices.

Global fuel inventories are brimming as refineries have churned out huge volumes of diesel, gasoline and jet fuel but the supply glut has diminished refining margins and demand failed to keep up with supply.

Global benchmark Brent crude was trading up 87 cents at $43.01 a barrel at 1354 GMT (7:24 p.m. in India), after touching a session high of $43.18.

US West Texas Intermediate (WTI) crude was up 67 cents at $40.73 a barrel, having reached a session high of $40.91.

"There is much talk about the product glut replacing the oil glut, and this is a worrisome indicator for crude demand," said Frank Klumpp, oil analyst at Stuttgart-based Landesbank Baden-Wuerttemberg.

Record inventory levels, additional supply capacity and weaker demand expectations led Natixis analysts to reduce their 2016 oil price estimates on Tuesday.

They cut average 2016 Brent prices to $43.70 a barrel and WTI to $42.00 a barrel, but left 2017 Brent prices unchanged.

"Despite demand growth slowing down towards the end of this year or early 2017, we think the current fall in oil prices will exacerbate capex cuts," Natixis analysts said.

Other analysts said high crude and product output would continue to weigh on markets and that as a result, refiners were likely to reduce orders for new crude feedstock, affecting demand for oil.

"Weaker crude throughput at refineries will lower crude demand," BMI Research said.

The outlook for lower demand is coupled with record-high crude production expected from OPEC members this month as top exporter Saudi Arabia pumps close to its highest level.

"With the market continuously focussing on oversupply, this bearish trend seems hard to change in the near term," said Hans van Cleef, ABN AMRO senior energy economist.

Financial oil traders have taken note of the bearish trend, with speculators taking on large volumes of bets that would profit from lower prices, known as shorts.

"Financial investors are increasingly betting on a continuing price slide and are thereby generating additional selling pressure," analysts at Commerzbank wrote.

US commercial crude inventories are expected to show a weekly fall after last week's unexpected rise in stocks broke a nine-week drawdown, according to a Reuters poll.

Gasoline and distillate inventories are also expected to have fallen, the poll indicated.

© Thomson Reuters 2016