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Oil Prices Decline on Supply Increase

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Oil Prices Decline

Oil Prices Decline on Supply Increase

July 16 2015, 07.55am GMT


Geopolitical factors and economic realities combined to push U.S. oil futures down to settle at their lowest level in three months on Wednesday.

Oil production figures, the weekly petroleum supply update and non-military consequences of the Iran deal, all played a part in exerting downward pressure on the oil price.

August West Texas Intermediate crude (CLQ, +0.70%) declined by $1.63 or 3.1% to close at $51.41 per barrel, to record its lowest settlement since 9 April.

In London, the ICE Futures Exchange saw August Brent crude (LCOQ%, +0.65%) fall by $1.46 to trade at $57.05 per barrel.

On Wednesday, the U.S. Energy Information Administration reported a drop in crude oil supplies for the week ended 10 July of 4.3 million barrels. Meanwhile, the American Petroleum Institute reported on Tuesday that crude supplies had fallen by 7.3 million barrels.

While the reports indicated a drop in production, the overall figures still indicate an increase in overall U.S. production. Commenting on the trader view of the current situation, Tyler Richey, co-editor of The 7.00 Report said traders were, “looking at the still elevated level of U.S. production.”

By  placing the U.S. drop in production in perspective, compared to the increase in Saudi Arabian production in June, this drew the further comment from Richey that, “[traders are] leaving the broader economic equation bearish for oil prices as the global glut in oil supply remains.”

Adding the Iran deal to the equation complicates matters further for the future of the oil price going into 2016. Reports indicate that sanctions will not be lifted immediately and in all probability not before 2016.

Once sanctions are lifted, Iran will again become a major player in the oil market although the question remains as to how soon it can ramp up oil production to previous levels, which should keep prices near or at the current lows. Iran is however reported to be sitting on some 30 million barrels of oil stored at sea which it will no doubt offer to the market at the earliest possible opportunity.

The Iran deal notwithstanding, the readiness of the Gulf States and Saudi Arabia in particular to use oil as a political weapon together with the current conflict situation in the Middle East, which to a large extent pits Saudi Arabia against Iran, can also have a bearish influence on oil prices.

The Saudis have made their intentions clear by continually upping crude production levels in the face of declining international demand for the product. The prospect of the military conflict with Iran becoming an economic conflict as well is very real.

The last word from Phil Flynn, senior market analyst at Price Futures Group, who said, “We know that OPEC’s main reason for flooding the market was to try to defend market share from the upstart U.S. shale producer.” He added, saying, “But the potential return of Iranian oil may actually turn OPEC’s production war away from the U.S. and focus on Iran.”

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