Perfect storm for oil: Three factors which led WTI, Brent to worst performance for the year

Perfect storm for oil: Three factors which led WTI, Brent to worst performance for the year

3 August 2015, 13:37
Alice F
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Brent dropped over 2 percent to $51.10 a barrel by 10:00 a.m. to a price not seen since the end of January. The benchmark is now on its longest weekly losing streak since late 2014. 

Meanwhile, WTI fell 68 cents to $46.43 a barrel after touching its lowest in four months at $46.35 a barrel. However, it was still off its March low which saw the commodity dip below $43 a barrel.

Barclays oil analyst Miswin Mahesh said in an interview with CNBC that a number of factors had come together to create a perfect storm for oil. He, however, remained upbeat on the price in the log-term, noting that demand is still underestimated and that U.S. production is still 60% lower than it was at the end of 2014.

"Come the next six to nine months, do not assume that OPEC will produce at these high levels," he said, referring to potential disruption in Iraq.

"As much as things are looking weak at the moment, I think the price in itself would be a catalyst to tighten market balances come 2016," he noted.

Barclays expect Brent to recover to $66 a barrel by the second quarter of 2016 and WTI to climb to $63 a barrel.

There is a series of reasons for the latest fall with several data points weighing heavily on Monday morning:

1) Output from the Organization of the Petroleum Exporting Countries (OPEC) in July touched its highest monthly level in recent history, said Reuters. This has led to worries of oversupply with the news agency also reporting Monday that Saudi Arabia is expected to raise its prices for its light crude by around $1 a barrel – a move that is likely to hurt demand.

2) U.S. shale rigs continue to recover with Baker Hughes data on Friday signaling a higher rig count for a second week in a row. Sentiment has also taken a hit, with net long positions on WTI declining last week, according to the U.S. Commodity Futures Trading Commission.

3) A worse-than-estimated Chinese economic indicator on Monday hardly lightened the mood with increased concerns that demand is set to weaken in the world's second largest economy.

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