Oil prices drop as oversupply looms amid global market woes

Oil prices fell on Friday and were heading for a third weekly loss, as Saudi Arabia warned of oversupply amid a slump in global equities and trade that cloud the fuel outlook for demand.A drilling rig of Austria’s oil and gas group OMV is seen at their exploratory drilling site near Maustrenk, Austria October 9, 2018. 

Brent crude futures LCOc1 were down 47 cents, or 0.6 percent, at $76.42 a barrel by 0519 GMT. The global benchmark is on course for a weekly loss of over 4 percent. U.S. crude CLc1 was down 60 cents, or 0.9 percent, at $66.73. The U.S. benchmark is set for a 3.5 percent loss this week.

“The near $10 per barrel drop in Brent crude seen over October is a spillover from the global sell-off in equities,” Fitch Solutions said in a note.Stock price plunges have roiled oil markets this week as Wall Street had its biggest daily decline since 2011, wiping out all of this year’s previous gains. This has also impacted energy firms, with the Australian energy index .AXEJ, which tracks the country’s main oil and gas firms, down 10 percent this week in what is the biggest fall in three years.

Financial markets have been hit hard by a range of worries, including the U.S.-China trade war, a rout in emerging market currencies, rising borrowing costs and bond yields, and economic concerns in Italy. There are also signs of a slowdown in global trade, with container and bulk freight rates dropping after rising for most of 2018. U.S. investment bank Jefferies said “the Brent curve is flirting with contango, a troubling development that we expect is at least in part driven by managed money liquidation in a broader risk-off trade.”

Contango describes a market in which prices for future delivery are higher than the spot market, implying oversupply as it can make it attractive for traders store oil rather than sell it. So far, the 2018 oil market has been dominated by backwardation, implying a tight market as spot prices are higher than those further out, incentivizing the sale of oil rather than storing it. Now, the two front-month Brent contracts are virtually flat. 


Saudi Arabia’s OPEC governor said on Thursday oil markets could face oversupply by the end of the year. “The market in the fourth quarter could be shifting toward an oversupply situation as evidenced by rising inventories over the past few weeks,” Adeeb Al-Aama told Reuters.

Saudi Arabia Energy Minister Khalid Al-Falih said there could be a need for intervention to reduce oil stockpiles after increases in recent months. For now, however, oil markets remain relatively tight, largely because of U.S. sanctions against Iran’s oil exports, which start on Nov. 4. Washington is putting pressure on governments around the world to stop importing Iranian oil. Most, including its biggest customer China, are falling in line, forcing Iran to storing unsold oil on tankers in the hope it can sell the crude off once sanctions are lifted again.

Sources and photo-credits: Reuters