Crude oil falls to 4-month low; weak demand, rising inventories among factor behind the cool off

The oil prices' decline was mainly triggered by a steep rise in U.S. crude inventories and production sustaining at record levels

Crude Oil prices have come under pressure, dropping nearly 5 percent on November 16 to lowest in four months amid an increase in US crude oil inventories, a rebound in US treasury yields, and global oil demand concerns. In the previous session, Brent crude oil, the international benchmark price, fell by 4.63 percent to close at $77.42 per barrel, while West Texas Intermediate crude oil futures fell 4.9 percent to settle at $72.90 per barrel. Both indices have lost around a sixth of their value over the last four weeks.

On November 17, Brent futures were up 10 cents, or 0.1 percent at $77.52 a barrel at 0232 GMT. U.S. West Texas Intermediate (WTI) crude (WTI) was nearly flat at $72.95.

Also Read | Oil prices slump to 4-month low on US, Chinese economic concerns

What's dragging crude oil prices?

Rise in US crude inventories

The oil prices' decline was mainly triggered by a steep rise in U.S. crude inventories and production sustaining at record levels, which analysts say triggered concerns of weak demand in the world's largest oil consumer amid high output. US crude oil inventories increased by 3.59MMbbls over the last week to a little over 439MMbbls - the highest since August, data released by the International Energy Agency (EIA) showed. This is after a 13.9MMbbls build in the previous week.

While this still leaves stocks below the 5-year average, they are trending back towards more typical levels for this time of year. "Concerns over a record-high US production rate put fresh pressure on oil prices, adding to an already worrisome demand outlook," Tina Teng, a markets analyst at CMC Markets in Auckland was quoted saying by Reuters.

IEA and the Organisation of Petroleum Exporting Countries (OPEC) have both predicted supply tightness in the fourth quarter. But some key economic data from around the world this week showed that demand was bleaker than forecast.

Demand Concerns

In Asia, Chinese economic activity rallied in October as industrial output increased at a faster pace and retail sales growth beat expectations. However, China's oil refinery throughput declined in October from the previous month's levels, attributed to weakened industrial fuel demand and narrower refining margins. This anticipated slowdown in Chinese oil refinery throughput, suggesting slowing demand in the world’s second-largest economy, has prompted a pause among crude oil investors.

There is also the seasonal impact of demand typically slowing in the winter. When there is a strong wave of non-OPEC+ supply growth and a seasonal decline in demand it leads to a situation like this, according to Jim Burkhard, president of S&P Global Commodity Insights. JPMorgan commodities research said that its global oil demand tracker showed demand averaged 101.6 million barrels a day in the first half of November, running 200,000 barrels a day lower than its projection for the month.

Speculators

OPEC has blamed speculators for the recent drop in oil prices, dismissing negative sentiment as exaggerated. “Despite the above healthy and supportive market fundamentals, oil prices have trended lower in recent weeks, mainly driven by financial market speculators,” the organization said in its monthly report.

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Sanctions on Iran

As the Israel-Hamas conflict appeared to be escalating in Gaza, US officials have said they would enforce oil sanctions against Iran, which has long been a backer of Hamas, Reuters reported. While US sanctions on Iran have remained in place, the US has not enforced them strongly, which has allowed Iranian oil exports to grow this year. However, stricter enforcement of these sanctions could lead to anywhere between 500 million-1,000 million barrels per day of supply lost, which would be enough to tighten up the global oil balance significantly through 2024, as per analysts.

Bond yields

U.S. Treasury yields rebounded from two-month lows on November 15 despite signs of slowing inflation, after a revision of retail sales data showed strong gains in September. Historically, higher US yields are accompanied by a stronger dollar, since dollars usually tend to chase higher yields. A stronger dollar along with higher interest rates make commodities such as crude oil costlier for those holding other currencies. This, in turn, could impact the demand for crude oil.

Technical factors

Technical factors are also restraining any upward movement in oil prices, according to Jun Rong Yeap, a market strategist at IG in Singapore. "Given that the tighter oil supply-demand dynamics have been less prominent from months ago, there has been some unwinding in previous bullish positioning ever since, with prices falling back below their 200-day moving average as a sign of sellers in control," Reuters cited Yeap saying.

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