Brent drops below $108 on worries over US shutdown

Brent crude extended losses below $108 a barrel today on concerns the US government shutdown would reduce demand for commodities, while expectations that US oil inventories rose last week also put pressure on prices.

Wrangling in the United States between president Barack Obama and congressional Republicans has forced the first government shutdown in 17 years. The shutdown has left hundreds of thousands of federal employees on unpaid leave and is expected to crimp demand in the world's largest oil consumer.

“It’s not so much the fact that you have all these federal workers not consuming. It’s the other 99 per cent of the population that are losing confidence in the people in government and their ability to do a good enough job,” said Jonathan Barratt, chief executive of commodity research firm BarrattBulletin in Sydney. “And that’s going to hurt demand.”

Brent crude for November fell 40 cents to $107.54 a barrel by 0617 GMT. The benchmark has fallen more than 8 per cent from a six-month high hit in late August.

US crude was at $101.57, down 47 cents, extending losses for a fourth straight session.

Oil prices have come tumbling down over the past month as supply has improved, with Libya ramping up output, while tensions over Syria and Iran eased.

“All the premium risk that was built into the oil market has evaporated. The bullish sentiment is just not there any longer,” said Mr Barratt.

Mr Barratt forecasted that Brent prices would fall to $93-$94 per barrel in the first quarter of next year, with WTI dropping to $85 per barrel.

Other risk assets have shrugged off the US government shutdown with equities gaining as investors bet normal operations would soon resume. Sentiment was also supported by robust US manufacturing activity, which expanded at its fastest pace in almost 2-1/2 years.

Oil prices were also hit today by expectations of a build in US crude inventories last week. The US Energy Information Administration is expected to show that crude stocks rose by 2.3 million barrels in the week ended September 27th, according to a Reuters poll.

In the previous week, EIA data showed crude stocks in Cushing, Oklahoma, the delivery point for the US oil futures contract, fell for the 12th consecutive week, but the pace of the drawdown slowed.

Data from the American Petroleum Institute, an industry group, showed that oil inventories rose by 4.6 million barrels last week. Stocks at Cushing fell 83,000 barrels, the API said.

The EIA data will be released at 1430 GMT. The EIA has said that despite the government shutdown, data will be released normally this week and next.

Opec’s secretary general Abdullah al-Badri indicated in an interview with Reuters that the cartel may not make big changes to output policy at a December meeting, adding he was “comfortable” with the market outlook for 2014.

The Organisation of the Petroleum Exporting Countries expects demand for its crude to fall to 29.61 million barrels per day in 2014, down 320,000 bpd from 2013, due to rising supply outside the producer group.

"It is not a huge drop in the call on Opec, " Mr Badri said.

Opec, which pumps more than a third of the world’s oil, meets on December 4th to decide whether to adjust its output target of 30 million barrels per day. (Reuters)