Oil's August bull run came to an end on Monday when crude prices ended their brief stay above $50 a barrel rumors of an OPEC production freeze gave way to the reality of burgeoning supplies.
Oil prices fell nearly 3% by midday in London, with Brent crude tumbling to $49.36, down $1.52 or 2.99%, while West Texas Intermediate crude retreated to $47.21, down $1.31 or 2.7%.
The falls came as traders accepted that a glut of oil was likely to be underpinned by increasing exports from Iraq, Iran and Nigeria, a growing rig count in the U.S. and ongoing strong exports of refined products from China.
Oil had rallied 20% in the first three weeks of August on rumors that OPEC would agree to cap oil production. That agreement would have broken a decade-long run, during which time the cartel has failed to agree on the amount of gas its 13 member-nations should pump.
Goldman Sachs on Monday dismissed talk of an OPEC production cap as a successful ploy to squeeze speculators with short oil positions. "The risk to OPEC production remains skewed to the upside," Goldman's Peter Hackworth and Henry Tarr noted. Morgan Stanley and Barclays analysts also issued notes speculating that buying by traders covering short positions likely drove the recent rally.
Meanwhile, signs that supply remains strong, and indications that it could grow, have become difficult to ignore.
China said last week its July exports of diesel and gasoline climbed 182% and 145% respectively compared with the same month last year, boosted by independent refineries that have returned to production as oil prices have risen. In the U.S., oil field services company Baker Hughes (BHI) said Friday that nine new rigs had come online in the past week, taking the total to 406, up 11% quarter on quarter.
