- Libya agreed on the process of appointing a central bank governor.
- A report from the Financial Times revealed that Saudi Arabia plans to expand oil production.
- US crude inventories fell by 4.5 million barrels last week, compared to estimates of a 1.4 million barrel draw.
Oil prices fell on Wednesday and Thursday as concerns about supply disruptions in Libya eased after a deal to end the conflict. At the same time, market participants were worried about a planned increase in Saudi Arabia’s oil production.
Oil chart (Source: Bloomberg, ICE)
Libya, a significant oil producer, had slashed production due to conflict in the country. Two factions have been fighting over control of the central bank and oil revenues. However, the dispute was partly resolved when they agreed on the process of appointing a central bank governor. Therefore, the risk of tighter supply is reduced.
Meanwhile, there were fears of increased supply as Saudi Arabia abandoned its price target for oil. Initially, the major producer had aimed for oil to hit a target of $100. However, a report from the Financial Times revealed that the producer plans to expand oil production.
Elsewhere, in the US, the threat of supply disruptions in the Gulf Coast eased as the expected hurricane changed direction and headed for Florida. The shift removed the premium on oil and weighed on prices.
Furthermore, investors remained concerned about demand despite China’s recent stimulus package. Most analysts were pessimistic, noting that China’s economy will likely need more support to recover and boost demand.
Oil prices had risen over 1.7% when the People’s Bank of China announced plans to cut rates by 50-bps. Moreover, the central bank plans to inject more money to support the economy’s recovery. China is a significant consumer of oil. Therefore, a weak economy dims the outlook for consumption. On the other hand, measures to support the economy improve the outlook and boost prices.
Despite the downward pressure on oil, some factors supported prices. Notably, US crude inventories fell by 4.5 million barrels last week, compared to estimates of a 1.4 million barrel draw. The significant drop was bullish for oil as it pointed to increased demand.
Meanwhile, tensions in the Middle East rose as Hezbollah and Israel fired missiles at each other. The growing conflict has raised fears of a bigger war that could disrupt oil distribution and tighten the market. Although this was bullish for oil, there was also downward pressure as the dollar rallied on safe-haven inflows.
