Oil Prices Dip As Short Covering Rally Fizzles Out

Oil prices fell yesterday, reversing earlier gains, as increases in OPEC production and United States oil rig additions continued to weigh on the market.

At around 0350 GMT, US benchmark West Texas Intermediate for delivery in September was up 25 cents, or 0.63 per cent, to $39.76 and Brent crude for October added 19 cents, or 0.45 per cent, at $41.99 a barrel.

World oil prices advanced Wednesday as tumbling USA motor fuel stockpiles offset news of a surprise increase in crude reserves, dealers said.

USA crude stockpiles probably dropped by 1.75 million barrels last week, according to a Bloomberg survey before a report from the Energy Information Administration today.

Both main crude contracts have plunged more than 20 percent from early June highs above $50 – signalling the commodity is now in a bear market – as fears over a long-running supply glut resurface.

U.S. Crude Oil was supported earlier on Wednesday following late Tuesday’s release of oil inventory data from the American Petroleum Institute. Analysts from Citigroup Inc.to Bank of America Merrill Lynch are confident the slump will be short-lived and investors are paying the smallest premium in two months to protect against a drop in crude from now through the end of the year. “There’s one number you might call bullish and that’s domestic production which was down 55,000 barrels per day”, he added.

In other news, Bloomberg reported that OPEC output fell by 80,000 barrels per day in July due to militant attacks in Nigeria and the ongoing dispute over control of Libya’s oil and exports.

Total motor gasoline inventories declined by 3.3 million barrels last week, but are still “well above the upper limit of the average range”, the EIA said.

“With the market continuously focussing on oversupply, this bearish trend seems hard to change in the near term”, said Hans van Cleef, ABN AMRO senior energy economist.

Financial oil traders have taken note of the glut, with speculators taking on large volumes of bets that would profit from lower prices, known as shorts.