Oil prices fell more than 3% today, reflecting growing concern that a two-month rally could fade as demand fails to keep up with swelling global supply including new output from Kuwait and Saudi Arabia.
Kuwait and Saudi Arabia's decision to resume oil production at the jointly operated 300,000-barrels-per-day Khafji field, at a time when production is supposed to be frozen, triggered the heavy selloff in the oil markets, traders said.
"The capacity of that field in the Neutral Zone is more than what Ecuador produces. If they do freeze it will not be at the January levels but at a lot higher figure," one trader said, referring to the Kuwait-Saudi border area where Khafji is located.
Oil prices have risen more than 30% since mid-February, ahead of a 17 April meeting in Doha where the Organization of Petroleum Exporting Countries (OPEC) and other major suppliers including Russia will discuss an output freeze aimed at bolstering prices.
But with global inventories swelling and signs some OPEC members are losing market share, the meeting is unlikely to do much to prop up prices, analysts and traders said
Rising demand for gasoline in the United States is not seen as keeping pace with the increased worldwide supplies.
Brent crude futures fell by $1.22 to $39.05 a barrel by 4.07pm Irish time, having lost 7% in the last week, while US crude dropped by $1.26 to $38.13.
Prices sank further after a source familiar with Iranian thinking said Tehran would attend the meeting in Doha, but not necessarily take part in negotiations over production freezes.
Market watchers now believe that the rebound in US crude prices from 12-year lows touched in February was more the consequence of a major short covering rally and less to do with improving fundamentals.
Big hedge funds have been closing out their bearish bets on US oil prices at the fastest pace on record, most recent data showed on Friday, with little indication that funds are prepared to bet on a quick rebound. Gross long positions have barely risen since January.
Data on Monday from the InterContinental Exchange showed speculators hold the largest net long position in Brent futures on record.
"Long positioning in Brent is at record highs and vulnerable for a bearish repositioning" said SEB commodities analyst Bjarne Schieldrop said.
US commercial crude stock piles were expected to have reached record highs for a seventh straight week, while refined product inventories likely fell, a Reuters survey showed late yesterday.
