Oil price heads lower on oversupply worries

The price of oil fell in Monday trading on concerns OPEC producers aren't complying with the output cut agreement and due to the stronger US dollar.

Oil price heads lower on oversupply worries

After a positive week of rising prices, the oil price moved lower in Monday trading, on fresh worries on oversupply, coupled with the still strengthening US dollar.

After hitting over $58 per barrel, Brent crude oil, the global benchmark of the commodity, fell to around $56 p/b at the end of Monday’s US trading session. The West Texas International (WTI) oil price, meanwhile, sank closer to the $50 p/b mark.

There were two pressure points pushing the oil price lower.

The first, is concerns on oversupply due to a fall in compliance with the agreed oil output cut, among members of the Organisation of Petroleum Exporting Countries (OPEC). Since March, OPEC members have observed an agreement to reduce output to 1.8 million barrels pd.

However, a recent Reuters poll suggests OPEC oil output rose some 50,000 per day during September. In addition to the possible increase in supply from OPEC, the number of active US oil rigs also rose during the final week of September.

As with supply and demand economics for any good or service, when the supply of that good – in this case oil – rises, it’s value declines.

The second reason behind the decline in the price of oil, was the value of the US dollar. Following a number of developments, including US President Trump’s planned tax reform’s, the Federal Reserve’s talk on raising rates and a string of strong data, the currency has gained strength.

As with the price of gold, oil is valued in dollars. Therefore, the higher value of the US dollar has made it more expensive for people not in the US, to buy oil. And this has exerted some downward pressure on the oil price.

The price of oil has been moving higher in recent weeks on confidence the global oversupply glut was being run down, in a large part thanks to strict discipline among OPEC members sticking to the output cut agreement.

However, an OPEC meeting mid-September ended with no agreement on future output cuts. Meanwhile, threats from Turkish PM Erdogan to turn off the oil taps have so far, proved empty.

As of 06:41 BST, Tuesday, 03 October, Oil share price is $49.59.

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