Crude oil falls as August price rally seen overblown

Oil prices fell on Monday as analysts doubted upcoming producer talks would rein in oversupply, saying that Brent would likely fall back below $50 a barrel as August’s more than 20-per cent crude rally looks overblown.

Soaring exports of refined products from China also pressured prices, as this was seen as the latest indicator of an ongoing global fuel glut, traders said.

China’s July exports of diesel and gasoline soared by 181.8 and 145.2 per cent, respectively compared with the same month last year, to 1.53 million tonnes and 970,000 tonnes each, putting pressure on refined product margins.

Brent crude futures were trading at $50.22 per barrel at 0224 GMT, down 66 cents, or 1.3 per cent.

US West Texas Intermediate (WTI) crude was down 51 cents, or 1.05 per cent, at $48.01 a barrel.

Short-covering

Analysts cast doubt on an August price rally, saying that much of it was a result of short-covering and anticipation of upcoming producer talks to discuss means to curb oversupply.

“Positioning data seems to confirm our view that the latest oil bounce is more technical and positioning-oriented than fundamental. In fact, new buyers have been mostly absent the past few months,” Morgan Stanley said.

Regarding the upcoming producer talks, the bank said a agreement was “highly unlikely” and that there were “too many headwinds and logistical challenges to a meaningful deal’’.

OPEC meet

Members of the Organization of the Petroleum Exporting Countries (OPEC) and other producers like Russia are set to meet in September to discuss a freeze in output levels in order to rein in on oversupply, but analysts said animosity between OPEC-members Saudi Arabia and Iran made a deal unlikely.

“Though Iran now sits roughly 200,000 barrels per day away from its monthly pre-sanctions peak in May 2011, we do not see it accepting restraints on its output, and without Iran's inclusion, Saudi Arabia will not take part,” Barclays said.

As a result, the bank said that “the stars remain misaligned for an OPEC/non-OPEC freeze agreement".

Because of the ongoing production and storage overhang in fuel markets, Barclays said that the 20-pe rcent price rally in August was unwarranted, and that oil prices of $50 or higher were unsustainable.

“Oil prices will likely experience another short-term dip in the coming weeks, in our view, before more sustainably moving to average $50 in Q4,” it added.

Adding to the outlook of plentiful supplies, the U.S. oil rig count increased by 10 last week.

“Since its recent trough in May 2016, the US oil rig count is up 28 percent at 406; this rebound has been driven by the increase in horizontal rigs,” said Goldman Sachs.

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