Oil prices slip under pressure from economic worries

The European Central Bank said the fall in oil prices over the past two years would add less to global growth than earlier thought. (Photo: Reuters)

Oil prices fell on Monday, weighed down by gloomy economic prospects in Europe and Asia and a related strengthening in the US dollar, which makes fuel imports for countries using other currencies more expensive.

The softening comes a week after crude prices hit 2016 highs on the back of a quicker-than-expected rebalancing in physical oil markets. Brent crude oil futures fell to $49.74 per barrel, at 1327 GMT, down 80 cents, after trading as low as $49.61.

US crude was down 72 cents at $48.35 a barrel. Commerzbank analyst Carsten Fritsch said worries that Britain will vote later this month to leave the European Union, which sent stocks spiraling lower on Monday, could also erase more of oil’s recent gains.

“The most recent oil price increase was driven by bullish market sentiment,” Fritsch told the Reuters Global Oil Forum. “A Brexit could turn market sentiment around.”

The dollar has risen 1.2 percent from June lows against a basket of currencies, lifted by Brexit worries, concerns over Asia’s economy and the prospect of a potential hike in US interest rates. There are also concerns about faltering growth in China, largely due to industrial overcapacity and spiraling debt.

On Monday, the European Central Bank also said the fall in oil prices over the past two years would add less to global growth than earlier thought and the overall impact could even be negative. Even the Organization of the Petroleum Exporting Countries (OPEC), while forecasting that the world oil market would be in better balance in the second half of 2016, warned there is “still a massive global supply overhang.”

“Oil traders have already sold out of long positions that have profited from an almost doubling in crude prices since hitting over decade lows earlier this year. Oil may be looking healthier than it has in a very long time, but it is not yet out of the woods,” Barclays said in a note.

Despite this, some of the supply disruptions that have helped to buoy prices could persist. On Monday, the Niger Delta Avengers group that has claimed the bulk of the attacks on the country’s oil infrastructure over the past several months, spurned proposed talks with the government.

Additionally, some analysts expect oil demand in Asia and especially China to remain strong. Vehicle sales in China rose 9.8 percent to 2.1 million units in May, the China Association of Automobile Manufacturers said on Monday, in the strongest year-on-year growth since December 2015. In the first five months of 2016, sales were up 7.0 percent.

“Against the backdrop of low international oil prices, Chinese crude oil demand will remain well supported this year as demand continues to gain traction from stockpiling activities and refining use,” energy consultancy FGE said.

“We expect Chinese crude oil imports to grow by 730,000-760,000 bpd this year,” it said.

Last Update: Wednesday, 20 May 2020 KSA 09:48 - GMT 06:48