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market | IST

Explained: Why are oil prices sliding and what is future outlook

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Crude oil benchmarks, Brent Crude futures and US West Texas Intermediate (WTI) futures declined half a percent each Thursday. In fact, Brent crude dipped below the threshold of $70 for some time, for the first time since July 21. While the price did see some rebound, crude has declined 7 percent this week.

Crude oil prices declined to $70 a barrel Thursday as countries imposed fresh movement restrictions to counter a surge in coronavirus cases due to the spread of the Delta variant. However, tensions in the Middle East offered some support to the commodity.
COVID-19 cases in the United States—the world's biggest oil consumer—hit a six-month high with over 100,000 infections reported Wednesday. In Asia, while China—the world's second-largest oil consumer—has imposed fresh restrictions in some cities and cancelled flights, Japan is poised to do so. These events will further threaten the oil demand in the coming days.
Crude oil benchmarks, Brent Crude futures and US West Texas Intermediate (WTI) futures declined half a percent each Thursday. In fact, Brent crude dipped below the threshold of $70 for some time, for the first time since July 21. While the price did see some rebound, crude has declined 7 percent this week.
Sushant Gupta of Wood Mackenzie believes the prices will continue to remain volatile.“We believe the crude oil prices will remain volatile as we had mentioned before, as the world grapples with and finds a balance between the news and market sentiments around the supply and demand side. So obviously, the downward pressure we see on oil prices today is coming from multiple factors,” said Gupta, in an interview with CNBC-TV18.
The latest trigger has been the US Weekly inventory numbers, where we have seen a surprise build-up. Crude oil stockpiles in the US rose by 3.6 million to 439.2 million barrels. Analysts expected the stockpiles to fall by 2.7 million barrels compared to the previous week.
Gupta is also considering an element of price correction. Crude oil prices had seen a sharp surge earlier in July when the oil cartel could not resolve output increase. It started in early July when Al Mazrouei, Energy Minister of United Arab Emirates (UAE) said oil cartel OPEC's quotas are unfair. Then on July 5, meetings between the cartel and its allies (Russia), that make OPEC+, were cancelled.
Following this, the prices of Brent crude climbed to $77 a barrel for the first time in two years. The price had later cooled down to $75. America's crude had briefly hit a six-year high. The cartel had later reached an agreement to increase oil output and start pumping out more oil in August. (UAE had thrown in its support after the group agreed to increase its output.) The news had taken some heat out of the oil prices.
“We must not forget that there is an element of price correction after prices rose sharply in early July when OPEC+ was not able to resolve production increase from August onwards,” Gupta said.
However, tensions in the Middle East are supporting the prices. Israeli aircraft struck what the country's military said were rocket launch sites in south Lebanon early on Thursday in response to earlier projectile fire towards Israel, Reuters reported. The exchange came after an attack on a tanker off the coast of Oman last Thursday, which Israel blamed on Iran. Two crew members, a Briton and a Romanian were killed. Iran denied involvement.
Iran is also inching up oil production as it continues to push exports, putting further downward pressure on the prices, Gupta added. As of now, Gupta expects prices to average around $74 a barrel. “For the remainder of this year, we still expect a tighter market but not as much as we were previously thinking. So we are forecasting around an average of $74 a barrel in prices. We're slowly seeing downward pressure as moved toward December,” he added.
For the entire interview, watch video
(With inputs from Reuters)