Oil price remains under pressure as OPEC pumps away

Oil prices on both sides of the Atlantic have continued to slide lower following the Greek election which so far has solved none of the issues and even raised the bar further on news that Greek political leaders said they would form a group to renegotiate the agreed austerity measures. Meanwhile in Spain, ten-year government bond yields have moved into bail out territory above seven percent and both these events threaten the economic growth in Europe and beyond - and thereby the demand for oil.

The continued slump in oil prices this week follows the OPEC meeting last week where Saudi Arabia resisted calls for a cut in production due to uncertainty about the impact of upcoming sanctions against Iran and the seasonal pick-up in demand during the third quarter. Against this backdrop of decreased demand at a time of record production, the road of least resistance for oil has been down.

Brent crude, the driver of the rally during the previous rallies in 2011 and latest during the first quarter, has been underperforming its American sister by a considerable margin and the spread between the two is approaching the February low of 12 dollars. Increased US and Canadian oil production has kept imports relatively low which, in turn, has left ample supplies in the Atlantic Basin and helped to push lower the price of Brent crude for prompt delivery. The removal of some of the supply constraints that has driven it higher in recent months has also impacted the time spreads in Brent crude. The spread between first and third month has moved from a backwardation (prompt price higher than deferred) of 2 dollars in March to almost flat today.

No doubt that Saudi Arabia almost singlehandedly has handed the biggest boost to the global economy during these last three months with their determination to bring down the price of oil. The big question now, however, is what will they do if the price continues to decline? OPEC secretary general el-Badri did say after the OPEC meeting last week that they stood ready to reduce supply surplus at short notice should it be required. Saudi Arabia is currently producing more oil than buyers are looking for, resulting in oil stocks within the Kingdom rising to their highest level in 10 years.

With the speculative overhang of long positions much reduced, with the sanctions most likely to go ahead and the increased chance of additional stimulus by global central banks, the price of oil should be looking to find support soon. But just like the fear of 150 dollars per barrel drove it higher in March, such are the worries about 50 dollars now that potential buyers are sitting on the fence waiting for a better opportunity to re-enter.