Oil Prices In Slight Decline Over Middle East Tensions

The price of oil fell slightly on Wednesday due to an oversupply in the market. Brent crude futures hovered around $50 a barrel although the Middle East tensions and the declining inventories in the United States provided support.

At 0504 GMT Brent crude futures fell by 4 cents from their previous close to settle at $50.08 a barrel. Since May 25, after both OPEC and non-OPEC producers agreed to extend production cuts to March next year, Brent has declined by about 7%. WTI crude futures, on the other hand, fell by 5 cents to close at $48.14 a barrel. This was a 6% decline since the May 25 open.

Fuel glut

Oil traders attributed the decline in oil prices to a fuel glut that has prevailed despite the steps that have been taken by both OPEC and non-OPEC producers to reduce output by close to 1.8 million barrels a day.

“Disappointed that the oil cartel and Russia could not come up with a bolder plan to reduce the global crude surplus, market participants have been selling into every bounce,” analyst at a futures brokerage, Fawad Razaqzada, said.

According to the Energy Information Administration of the United States, there is balance in fuel production and fuel consumption at close to 98 million barrels a day. The problem lies, however, in inventories which remain bloated and this is likely to remain the key driver in the price of oil.

Rising U.S. production

The efforts by OPEC to reduce supply in the market also stands to be undermined by production in the United States which is expected to reach 10 million barrels a day next year. This is a record level and is an increase from 9.3 million barrels a day that are currently being produced. At 10 million bpd, the production in the U.S. could be at par with that of Saudi Arabia.

What is supporting the market right now are the Middle East tensions which were triggered by a coalition of Arab nations consisting of the UAE, Egypt, Saudi Arabia, and Bahrain and moving to isolate Qatar over claims that the tiny country was sponsoring Islamic militants. Unless resolved in time, the development could result in trade disruptions and this includes oil since Qatari-flagged vessels are facing port restrictions. The disruptions are expected to have a short-term effect though on oil rather than a long-term one.

Also expected to help in determining an oil price floor are official U.S. oil inventory data which will be released on Wednesday.

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