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Commodities

Oil slips to 3-month low amid oversupply

TOKYO -- Oil fell below $40 for the first time in three months Monday, reflecting disappointment with U.S. gasoline demand and slackness stemming from production hikes in the Middle East.

Benchmark West Texas Intermediate futures for September delivery ended down 3.7% at $40.06 a barrel in New York after falling to the lower $39 range at one point. On Tuesday, it again fell under $40, closing at $39.60.

The bump in U.S. gasoline demand from summer travel has proved smaller than expected this year, with consumption failing to balance out increased refinery output earlier in the year. This has strengthened the market's sense of oversupply. "Expectations that oil demand will fall going forward have darkened market sentiment," said Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp.

Crude output remains on the rise in the Middle East. Iran is well on its way to returning to pre-sanction production levels, with output exceeding 3.6 million barrels per day. Saudi Arabia's daily production is now more than 10 million barrels. Libya is working to resume oil exports as well, despite ongoing political instability.

Yet North American producers are ultimately the key players, Falah Alamri, Iraq's governor for OPEC, has said. Climbing prices through June pushed oil businesses in the U.S. to boost output. More than 370 rigs were operating in the country at the end of July, marking the fifth straight week of increases.

"It will become more difficult to properly adjust production as the cost of extracting shale oil declines," said Jun Inoue, senior economist at the Mizuho Research Institute. Hedge funds have strengthened selling of oil futures as output has recovered, putting downward pressure on prices.

Cheap oil is also lubricating a slide in resource shares. The Nikkei Stock Average fell 1% to 16,639 Tuesday after a two-session climb. Oil developer Inpex tumbled nearly 6%, while JX Holdings dropped 2%. "Japanese shares will be at higher risk for selling" if more investors "view rising oil inventories as a consequence of economic weakness," said Seki Orimi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Others remain more upbeat, predicting oil prices will start rising again in the medium term. Some players would be forced to stop producing if prices fell to the upper $30 level, said Tony Nunan of Mitsubishi Corp. Even if prices drop below $40 temporarily, they should head toward $45 or $50 as the year draws to a close, he said.

The International Energy Agency continues to predict demand growth centered on India and China will help tighten the market by the end of the year. "As long as economic uncertainty in China and Europe does not come to a head, supply and demand will move toward equilibrium," predicted Ken Koyama of the Institute of Energy Economics, Japan.

(Nikkei)

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