OIL prices edged higher on July 23, aided by a drop in the dollar, although rising supplies of crude oil in the US kept the futures market in a tight range. Crude oil stocks in the US rose by 2.5m barrels last week to above the five-year seasonal average, according to data from the Energy Information Administration, trumping expectations for a drop of 2.3m.

The US September crude futures were 31 cents higher at $49.50, having fallen by $1.67 on July 22, to settle below $50 for the first time since April. Brent crude was up 11 cents at $56.24/bbl.

The price of Brent has fallen by about 12pc in July, its largest monthly fall since March, pummelled by concern about the ability of the global economy to absorb a surplus of oil.

The oil glut looks set to grow as an Iranian nuclear deal with the West is expected to release millions of barrels of additional supply onto world markets.

Adding to the prospect of this surplus persisting, Opec delegates from the Gulf states and other nations say that the recent drop in prices is likely to be short-term. They say that lower prices will not deter the cartel from keeping output high to defend market share.

The dollar headed for its first weekly loss in a month but held near a three-month high, which tends to make it more profitable for non-US investors to sell dollar-denominated assets such as oil or gold.

Crude oil prices are projected to drop 40pc this year, averaging $57.4/bbl. Most of the decline has already occurred, implying flat oil prices for the rest of the year even as the large supply surplus begins to contract. Prices are expected to rise $4/bbl in 2016, as supply growth slows.

Downside risks to the fore-cast include more resilient production from non Opec producers via cost and efficiency improvements, and higher Opec production mainly from Iraq, Iran, and Saudi Arabia as they increase market share.

Upside risks include stronger growth in demand, accelerated closure of high cost production, Opec supply restraint, and unexpected outages as geopolitical risks continue to hover over the market. This was stated by the World Bank in its latest Commodity Markets Outlook.

World oil demand growth is expected to slow in the second half of the year as the effects of lower prices diminish, with annual global growth projected at 1.4mbpd or 1.5pc year-on- year. Non-OECD demand is expected to climb by 1.0mbpd (2pc), with growth slightly weaker than in recent years; all three main OECD regions are projected to record annual increases together for the first time since 2005. Global oil demand in 2016 is projected to slow to 1.2mbpd (1.3pc), with all gains coming in the non OECD and OECD Americas.

Global oil supply continued to outpace demand by a large margin, recording year-on-year growth in the first and second quarters of 3.1mbpd and 3.3mbpd, respectively. Increases occurred in both non-Opec and Opec countries. In the first quarter, non-Opec accounted for much of the growth (2.4mbpd), with most of the gains concentrated in three countries — Brazil, Canada, and the US.

In the second quarter, non-Opec growth slowed to 1.6mbpd, reflecting weaker growth in the US and minimal growth in Canada due to oils sands upgrader maintenance and wildfires in Alberta that reduced output of mainly heavy crude.

Production continued rising in other major producing countries, including Russia where, despite the effects of sanctions, ruble devaluation and improved upstream taxation boosted activity.

Currency devaluation in other producing countries also helped support production and exports.

The current downturn in the global oil industry may prove to be more severe than in 1986, when business endured the deepest slump in 45 years, as Opec keeps markets oversupplied, according to Morgan Stanley.

Increased production from Opec is more than compensating for slowing growth in US shale oil, the bank said in a report. The Opec has boosted output by 1.5mbpd since February, an amount roughly equal to a year’s increase in world demand, it said.

Oil producers have cut $130bn in investment and retrenched 70,000 workers in response to lower prices, Morgan Stanley estimates.

Crude has tumbled as Opec maintains elevated output to pressure rival producers including shale drillers in North America. Brent crude futures traded near $56/bbl in London on July 22, down 47pc from a year ago.

GOLD

GOLD prices fell for the 10th straight session July 22, as investors fled the precious metal on fears of continued dollar strength and a rate increase from the Federal Reserve in coming months.

Gold for August delivery, the most actively traded contract, closed down 1.1pc at $1,091.50/troy ounce on the Comex division of the New York Mercantile Exchange. The precious metal is at its lowest level in more than five years, having notched its longest losing streak since 1996.

In the London market gold bounced back above $1,100/ounce on July 23 from the previous session’s five-year low, as a retreat in the dollar prompted some investors to take advantage of the price drop to buy back into the market.

Many remained wary towards the precious metal, however, after it posted its deepest one-day loss in nearly two years on July 20, pushing prices through key chart levels and setting it up for further weakness.

Gold tumbled as much as 4pc on July 20, in a sell-off exacerbated by big trading volumes on the Shanghai Gold Exchange after investors dumped more than $500m of bullion in New York in seconds during early Asian trading hours.

Published in Dawn, Economic & Business July 27th, 2015

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