Brent drops towards $107 as supply outlook improves

But growing tension between the West and Russia over Ukraine put a floor under prices

Brent futures eased towards $107 a barrel today as the global supply outlook improved with more Libyan supplies expected to reach the market, although growing tension between the West and Russia over Ukraine put a floor under prices.

Oil prices also came under pressure as producer-group OPEC said it sees lower demand for its oil this year, highlighting concerns over the economy and competition from rival producers, just as data from China showed imports fell to a five-month low.

Earlier in the week, United States said oil inventories rose on the back of a local production boom.

Brent crude fell 27 cents to $107.19 a barrel by 0526 GMT, after settling 52 cents lower. The contract is set to end the week 0.5 per cent higher, recouping part of the previous week’s losses. US oil fell 33 cents to $103.07, but is set to end the week 2 per cent higher.

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“The markets will be softer from these levels as production growth will be faster than demand growth,” said Ken Hasegawa, a commodity sales manager at Newedge Japan. “Investors are keeping an eye on the Ukraine situation, but the possibility of further upside in prices looks limited at this point.”

Hasegawa sees very strong resistance for the US benchmark at $105 a barrel and a rise to that level would prompt investors to sell and book profits, creating a possibility of a slide to $100. Similarly, $108.50 is a strong resistance level for Brent, and the benchmark may dip to $105 after touching that level.

The Organization of the Petroleum Exporting Countries (Opec)in its monthly report yesterday forecast demand for its crude oil in 2014 would average 29.65 million barrels per day, down 50,000 bpd from the previous estimate.

Libya's state National Oil Corp lifted force majeure for the eastern port of Hariga. That follows a deal Tripoli reached with a federalist group at the weekend to reopen two ports they were blocking for months. The federalists are still blockading the country's two biggest ports, Es Sider and Ras Lanuf, as well as Libya's largest oil refinery.

“Due to expectations of recovering exports from Libya, further upside in Brent is likely to be limited,” Mr Hasegawa said.

Investors are now watching progress in handing over the other, bigger ports to the government.

Despite expectations of rising supply amid a weak demand outlook, worries that a standoff between Russia and the West will turn for the worse underpinned oil prices.

President Vladimir Putin warned yesterday that Russian gas supplies to Europe could be disrupted if Moscow cuts the flow to Ukraine over unpaid bills, drawing a US accusation that it is using energy "as a tool of coercion".

The United States also warned that any oil-for-goods deal Moscow might strike with Iran could run afoul of US sanctions.

A deal would run counter to an agreement between Iran and six world powers, including the United States and Russia, in which Tehran promised to curb its nuclear program in return for a modest easing in Western sanctions.

"Despite headwinds coming from disappointing China trade data and bearish Energy Information Administration (EIA) weekly US crude inventory release, new developments in Libya, Iran and Ukraine pegged prices at elevated levels," analysts at Phillip Futures said in a note. (Reuters)