Oil prices edge away from two-month low, but outlook stays weak

Oil prices edged away from over two-month lows on Thursday, but the outlook remains bleak as traders ditch positions and producers hedge themselves against lower prices despite some analysts saying market oversupply may have been overstated.

U.S. crude futures CLc1 were at $43.16 a barrel at 0714 GMT, up 23 cents from Wednesday when prices tumbled 3 percent on the back of high production, rising U.S. stocks and an economic slowdown in Asia.

Brent crude futures LCOc1 were at $45.97 a barrel, up 16 cents following a 3.4-percent fall the previous day.

Trading data showed there seemed to be shift in sentiment towards a lower oil price outlook, with 90,000 contracts having been sold down this month, pulling open interest off a historic high as traders sell out of oil.

At the same time, oil producers have hiked their short positions in Brent futures to record highs of almost 1.3 million in a sign that they are increasingly hedging their production in expectation of lower prices.

Beyond high production and brimming storage tanks, sentiment has also been hit by a growing sense that Asia’s two biggest economies were slowing sharply after China’s factory output growth eased further.

The slowdown in China has pulled down the entire commodity sector, with products like crude, copper, liquefied natural gas, coal and iron ore all down between 20 and 30 percent this year, on a re-based basis valued at 100 points on January 1.

Adding to demand worries are fears that Japan’s economy may have fallen into recession and that emerging markets across the world are struggling with a soaring debt mountain that threatens growth.

Yet some analysts said estimates of oversupply that usually range between 1.5 and 2.5 million barrels per day (bpd) for 2015 were likely overstated.

“By our estimates, the average 2015 oversupply is only 0.7-1.0 million bpd,” said Adam Longson in a note to clients, adding that most other estimates failed to account for short-term stock changes, including strategic reserves, and seasonality for supply and demand balances.

“Intentional efforts to build or sell out government stockpiles that are not available to the market, nor included in demand figures, could help tighten the balance beyond headline implied stock changes,” Longson said.

“The worst of the price fall could now be behind us,” Barclays said, but added that “any significant move up in prices from current levels in the short term might be premature and difficult to sustain.”

Source: Reuters