Oil prices continues downtrend mainly due to concern with dwindling demand

2018-08-20 02:43:44 GMT2018-08-20 10:43:44(Beijing Time) Xinhua English

The oil prices continued its downtrend last week, recording a loss in the sixth of the last seven weeks. The price of West Texas Intermediate (WTI) for September delivery and Brent for October delivery decreased by 2.54 percent and 1.35 percent, respectively. And on Friday, WTI closed at 65.91 U.S. dollars a barrel and Brent settled at 71.83 dollars a barrel.

Oil prices started the week with slight losses the markets concerned about the Turkey's currency crisis and the ongoing trade dispute between the United States and China.

On Monday, WTI decreased by 0.86 percent and settled at 67.20 dollars a barrel on the New York Mercantile Exchange. Brent decreased by 0.52 percent and settled at 72.61 dollars per barrel on ICE Futures Europe.

On Wednesday, U.S. Energy Information Administration (EIA) reported a large build of 6.8 million barrels in commercial crude oil inventories during the week ending Aug. 10, much more than what the market has expected.

Meanwhile, the U.S. import of crude oil increased by 7.58 million barrels, which were much higher for the week, compared with the reported level of previous week and the same period of last year. But the export decreased by 1.81 million barrels in the week.

EIA also reported a build of 3.57 million barrels in distillate fuel inventories, which was much higher than the market's expectation, and a draw of 740,000 barrels in total gasoline inventories, which was close to the market's expectation.

However, the large build of inventories in crude oil and distillate fuel right before the end of the driving season in the United States concerned the market.

On Wednesday, the mood of concern was intensified by the currency crisis in Turkey. Major global financial firms which have loaned substantial amounts to the country are facing highly risk exposure due to the ongoing economic turmoil in the emerging economy.

WTI and Brent suffered losses and declined by 2.42 percent and 1.95 percent, respectively, on Wednesday.

EIA also reported on Wednesday that U.S. oil production increased to 10.9 million barrels per day during the week ending Aug. 10. U.S. net import increased by 1.34 million barrels per day during the week. Analysts attributed the increasing U.S. imports to the higher input of U.S. refineries.

Anas Alhajji, an energy economist based in Dallas, Texas, told Xinhua that "Unlike the past, U.S. weekly crude oil inventories have become extremely sensitive to U.S. net imports, making short term oil prices more volatile."

U.S. net import, measuring the import deducted by its export, is a very important indicator for the oil prices movement.

On Friday, Houston-based Baker Hughes reported that the number of active drilling rigs in the United States remained unchanged at 1057 after the steep increase in rig counts in the previous week. However, the pipeline bottleneck is still the main factor to cause bigger price differential between Midland and WTI. Analysts see those pipeline bottlenecks as a big threat against production growth of the Permian Basin, located in the west Texas and southeast New Mexico.

In fact, the market felt kind of relief after the report of active drilling rigs by Baker Hughes. On Friday, U.S. Dollar Index continued its downtrend that started on Thursday. It was a supportive factor for the oil prices.

U.S. Dollar Index is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. Oil is mostly traded in dollars all over the world and a stronger dollar pressures the oil demand.

Furthermore, the report indicating that the United States and China are going to get back to the table for solutions to the ongoing trade tensions helped support the crude prices on Thursday and Friday. Both WTI and Brent increased by 0.67 percent on Friday.

The price differential between WTI and Brent widened mainly due to the less U.S. export of crude oil. The differential was 5.92 dollars at the end of last week. Analysts pointed out the widening gap between WTI and Brent can support U.S. oil exports in the future.

The higher differential between the two major benchmarks are, the more arbitrage opportunities for traders to pursue. As a result, more U.S. crude oil would be shipped to Asian market.

The oil market will continue to concern with the ongoing trade disputes globally as it might slow down the economic growth, especially the Chinese demand on energy, because the Chinese oil demand growth has been the main driver for the increasing world oil demand.

The oil market will be watching the development of trade negotiation between China and the United States. Furthermore, the market will focus on the upcoming inventory report to see if the builds will sustain.

Matthew Smith, the director of commodity research at ClipperData in Houston, told Xinhua that "the market continues to be confused by the conundrum of immediate strong supply, offset by the expectation of lower supplies in the coming months. Immediately stronger exports from key producing regions are keeping global benchmarks in contango -- meaning near-term prices are lower than longer-term ones -- signaling a well-supplied market."

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