Crude Oil Slips on Renewed Concerns Over OPEC Production, Chinese Demand

Crude oil prices were lower on Wednesday as investors expressed concerns over increased Middle East production which affects the supply side and the state of China’s economy which affects the demand side.

U.S. West Texas Intermediate July crude oil futures were down $0.37, or -0.75% at $48.73 while international benchmark Brent crude oil futures were trading at $49.59 per barrel, down 30 cents, or -0.6 percent.

Traders blamed today’s weakness on the prospect of rising output from Middle East members of the Organization of the Petroleum Exporting Countries (OPEC), which meets this week in Vienna to discuss its market policy, which most analysts say will continue to focus on defending market share instead of propping up prices by controlling output.

Recent data suggests that many OPEC members have plans to grow, so cutting supply now may interfere with those objectives. These include top exporter Saudi Arabia, followed by Iraq, Iran and the United Arab Emirates. All have vowed to ramp up their supplies to Asia and all will continue to compete for market share.

On the demand side, the real worry is the slowing Chinese economy. Data from April indicates that oil demand from the country is declining.

Overbought conditions are also weighing on investor sentiment. A recent Reuters poll supports this assessment. It showed that most oil investors expect only limited potential for further price gains this year as production continues to outpace demand.

Barclays is also concerned about U.S. demand. Its research indicates that in the United States, the world’s largest consumer, demand increased by 2 percent in March, compared to the same month last year, to 19.6 million barrels per day (bpd), the highest seasonal level since 2008.

This likely means that the over 20 percent gain in prices since April was largely fueled by supply disruptions across the globe, and especially Nigeria and Canada. Since these are considered by most investors to be short-term events, many traders feel the current rally is unstainable and that prices should begin retreating soon.

Due to Monday’s Memorial Day holiday, the U.S. Energy Information Administration’s weekly crude inventory report is set for release Thursday rather than Wednesday. The American Petroleum Institute’s weekly report will be released later today.