Saudi Arabia: Oil prices under pressure from Brexit vote and glut fears
July 27, 2016
The upward trend in oil prices that followed the rebound from January’s 13-year low came to a halt at the end of June. Growing global uncertainty following the Brexit vote and concerns about ample oversupply have driven oil prices back down to levels that were last observed two months ago. The price of the Organization of Petroleum Exporting Countries’ (OPEC) oil basket traded at USD 41.4 per barrel on 25 July. This represented a decline of 7.9% over the same day of the previous month. On an annual basis, oil prices were down 20.6%.
The Brexit vote drove investors to seek refuge in safe-haven assets such as the U.S. dollar and gold. As a result, a strong U.S. dollar and rising risk aversion exerted downward pressure on oil prices. While the effects of the UK referendum had started to fade towards the end of July, concerns about oversupply have since caused prices to continue the downward trend. Canada resumed its oil sands production after the wildfires were brought under control, while Iran continued to pump crude at multi-year highs in an attempt to regain its market share. Production also strengthened in some countries affected by geopolitical threats, including Nigeria. In the United States, the number of oil rigs has increased in the past four weeks, fueling expectations that the global oil glut will persist for longer than previously anticipated. Finally, a seasonal spike in gasoline demand in the United States has not mitigated the gasoline overload on the international markets, suggesting that both crude oil and its product markets are oversupplied.
OPEC pumped 32.86 million barrels per day (mbpd) in June, which was up from the 32.59 mbpd extracted in May. According to the latest OPEC Monthly Oil Market Report, June’s increase in output mainly reflected stronger production in Iran, Kuwait, Libya, Nigeria, Saudi Arabia and the United Arab Emirates. On the other hand, Iraq and Venezuela recorded significant production declines in the same month. Saudi Arabia produced 10.31 mbpd in June, which was above the 10.24 mbpd recorded in the previous month.