LONDON: Oil prices fell Tuesday after sources said slower demand had led top exporter Saudi Arabia to cut back production and the International Energy Agency warned that strong prices could be eroding demand.
ICE Brent crude futures for May were 59 cents lower at 123.41 a barrel by 1315 GMT, albeit off earlier lows of $121.97 earlier in the session.
U.S. crude for May delivery fell by $1.74 to $108.18 a barrel, off earlier lows of $107.87.
Sources told Reuters that Saudi Arabia, which has the largest spare capacity cushion in the Organization of Petroleum Exporting Countries, had trimmed production by around 500,000 barrels per day to around 8.5 million bpd on the back of slow demand.
Investors that bought into the oil market in the past few months could now be taking a chance to exit, according to Brendan Brown, head of economic research at Mitsubishi UFG Securities.
“I think we are going to see some sort of a rotation, with some investors deciding to get out and take some profit,” Brown told Reuters.
Saudi Arabia’s production cuts comes amid growing fears that strong crude oil prices are denting demand growth. The IEA, the West’s energy policy adviser, earlier warned prices could ultimately self-regulate through a global economic slowdown.
Despite the warnings, analysts said the agency had kept its forecasts unchanged, noting that a flat reading of Saudi Arabian production raised questions about spare capacity.
“The IEA shows no rise in their estimate for Saudi Arabia’s crude production in March at a flat 8.9 million barrels per day,” BNP Paribas’ head of commodity markets strategy Harry Tchilinguirian said.
“This in turn may raise questions in terms of Saudi Arabia’s willingness, ability or pricing policy to deliver extra barrels onto the market.”
The agency said prices of $100 per barrel or above could prove incompatible with the expected pace of economic recovery. The IEA’s warning on prices followed a note from long-term commodity bull Goldman late Monday advising clients to take profit.
Societe Generale also weighed into the demand destruction debate, highlighting gasoline in the U.S. as probably the first casualty.
“In the U.S., where low taxes on refined products for end-users cause a rapid and direct pass-through of underlying costs, the focus on increasing gasoline prices has been intense in both the business and general media,” the bank’s analysts wrote in a note. “This has driven mounting concerns in the oil markets about ‘demand destruction’ in the U.S.”
“Geopolitics [are] still critical,” SG analysts said in the report. “But with prices high, markets may be having doubts on demand.”
Demand concerns also heightened in No. 3 oil consumer Japan, where the evacuation zone around its damaged nuclear plant was expanded because of high levels of accumulated radiation, as a strong aftershock rattled the area.
In the U.S., demand has moved sideways, according to SocGen. “When compared to an increasing trend for the first three quarters of last year, this means that demand growth has faded to zero over the course of the first quarter.”
Weekly oil inventory reports from the American Petroleum Institute will offer a fresh snapshot of U.S. demand and stockpiles at 2030 GMT.
Analysts surveyed Monday expected crude stocks to have risen last week, with distillate stocks dipping and gasoline stocks dropping.
The U.S. Commodity Futures Trading Commission said that as of last Tuesday, hedge funds and other financial traders held a total net-long positions in U.S. crude contracts equivalent to a near record 267.5 million barrels.