Oil prices retreat on mounting oversupply concerns

International benchmark Brent and West Texas Intermediate (WTI) extended losses on Friday after a surprise rise in US crude inventories triggered concerns over a supply glut in the global oil market already rattled by Covid-19.

Brent futures were down around 0.3 percent, trading at $39.94 a barrel, while US crude shed nearly 0.2 percent to $37.24 a barrel. Friday’s drop came after both brands declined around two percent in the previous session, and could mark a second week of declines for the commodity.

Fresh concerns over weakening demand were sparked by the first build in US commercial crude inventories over several consecutive weeks, defying market expectations. According to a recent report from the Energy Information Administration (EIA), US crude inventories rose by 2 million barrels for the week that ended September 4.

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The official EIA data was not as gloomy as an earlier report from the American Petroleum Institute (API), which expected that US crude supplies rose by about 3 million barrels during the past week.

“There continues to be concern over the state of the physical market, with values weakening and increasing difficulty in shifting West African cargoes – likely due to a lack of Chinese buying recently,” ING analysts said in a note earlier this week.

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As global oil inventories are sharply above average and market fundamentals are not improving, according to Morgan Stanley, some traders have reportedly started to book tankers to store millions of barrels of crude oil and refined fuels at sea again. This could be another warning sign that supply is outpacing demand.

Oil was stranded at sea onboard tankers in April, when crude prices crashed to historic lows as the coronavirus crisis crippled demand in addition to the lack of cuts from the main exporters. This prompted the Organization of the Petroleum Exporting Countries (OPEC) and allied oil producers, together known as OPEC+, to sign a new deal to restrain production. The market monitoring panel of OPEC and allies is set to meet next week, but it is unlikely that any further cuts will be implemented.

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