Weak Demand Causes Recent Reduction in Oil Prices

Oil prices have dropped by about 3% in the last couple of days as investors face weak demand.

Recently, crude oil prices fell by 1.9% or $2.01 to end at $106.55 per barrel n the New York Mercantile Exchange. That level is lower by 2.9% compared to its latest attainment in a period of nine months which is $109. During the same time, Brent crude prices, the benchmark of Europe, decreased by 3.1% and finished at $121.55 per barrel.

The reduction of oil prices is a complete turnaround from several days ago when traders were not worried by data that showed low demand because they were more focused on supply disruption concerns caused by tensions between Iran and the West.

However, the recent data on the consumption of motor fuel in the United States, the largest oil user worldwide, grabbed their attention. According to a report of SpendingPulse, during the week that ended on the 24th of February, there was a 6.9% reduction in gasoline demand to reach 627,000 barrels daily. The drop was its largest yearly fall since the 10th of October in 2008.

Economic slowdown and higher prices have limited the demand for energy particularly in developed countries. Consumption of gasoline in the United States has been decreasing for many months and leading the total petroleum demand of the country to its lowest level in 15 years.

Still, because of the continuous Iranian tensions, few are eager to disregard the possibility of a sharp increase in oil prices. Iran as the fifth biggest producer of oil worldwide can leave other nations searching for other sources and bidding higher oil prices in case the country cuts its oil supply.

Analysts of J.P. Morgan observed a considerable demand from traders to ask for protection over sharp increases in oil prices. Apparently, the traders will increase their purchases if they were concerned about growing crude prices, said Philip Verleger, an independent economist of energy.

Standard Bank’s analyst Mr. James Zhang said that there are other indications in the physical market showing that growing crude prices had weakened refineries’ demands. In a note he recently wrote, he said that the physical market’s weakness will spread to a significant oil price correction in the next weeks.

By Chris Termeer