Sub $40 Oil Prices Coming

Oil dropped to the lowest level in nearly three months as government data showed USA crude stockpiles rose to the highest for this time of year since 1930.

The U.S. energy Information Administration (EIA) Wednesday will release the inventories data of last week.

Compounding the production glut is an expectation of a mild winter as a result of an El Nino weather pattern, which is expected to limit heating oil demand. The spread between Brent and USA crude, at $1.95, narrowed to its lowest level since mid October.

The Organization of the Petroleum Exporting Countries, known as OPEC, failed to produce a consensus on production in a meeting on Tuesday, something which analysts say doesn’t bode well for the possibility of production cuts ahead of their December 4 meeting.

“The market is actively seeking storage solutions”, Jefferies said in a note, but with January 2017 prices around $6 a barrel above those for January 2016, the spread is too low to make floating storage attractive as freight costs still have to be included.

OPEC’s second-biggest producer, Iraq, has sold some crude grades for as little as $30 a barrel, trade sources said, acting as a further drag on futures.

Front-month U.S. crude futures initially rose towards US$42 per barrel but then dipped back to US$41,69 a barrel early yesterday down 5 cents from its last settlement.

December WTI expires on Friday, putting the market at further risk of testing August’s sub-$40 lows.

“The well supplied crude market, record high inventories in OECD and lack of a material threat to the oil facilities in the Middle East from the military escalation against IS in Syria are going to prevent geopolitical premiums building in oil prices in the aftermath of the Paris terrorist attacks”, BMI Research said.

According to analysts, the crude inventory is expected to rise by 1.9 million barrels during the In the week ended 13 November. As the oil prices have an impact on worldwide economy, some volatility for the currencies, especially for the CAD is anticipated.

Dragosits said another negative for oil was the repeated claim by Iran that it will put 500,000 barrels a day on the market as soon as sanctions are lifted, and another 500,000 six months later.

However, prices have been trading in a narrow range of $40-$42 per barrel over the last four days. “We believe the low oil price environment will lead to a decline in drilling activity in the coming weeks”.

Analyst Malcolm Graham Wood noted that despite terrorist action and geopolitical concerns. on oil “for the time being nothing has changed on fundamentals”.