Oil prices drop as Middle East tension eases

Saudi Arabia said on Tuesday it was ending a month-long military campaign against the Houthi rebels who seized large areas of Yemen, bringing hope of a peaceful political solution to the conflict in the key oil producing region.

Oil prices had gained nearly $10 a barrel this month on tensions in the Middle East and concerns over slowing output growth in the United States, before starting to drop back.

Prices are unlikely to plumb new depths this year, however, leading commodity traders said on Tuesday, citing strengthening demand.

“We will probably see one more dip in the second quarter but prices probably won’t go below this year’s lows,” said Ian Taylor, head of the world’s top oil trader, Vitol.

“Gasoline is coming back with a vengeance. Refining margins are not as bad as we had feared,” he said.

Growth in demand outside the United States was impressive in India, South Africa and Europe, he added.

Brent for June delivery was down 43 cents at $61.65 a barrel by 0650 GMT, after settling $1.27 lower on Tuesday.

U.S. crude for June delivery was 70 cents lower at $55.91 a barrel. The May contract, which expired on Tuesday, ended down $1.12.

“The world has been focused for the last six months on destroying supply,” said Executive Chairman Gary Ross of the PIRA Energy Group consultancy in an interview.

“Increasingly the mindset is going to change. They’ll have to start thinking about creating supply again, and that’s going to mean a lot higher prices than today,” he said.

Still, crude oil storage in the United States has reached the highest levels since 2011, with tanks in the Cushing, Oklahoma hub running nearly 80 percent full, according to energy markets intelligence firm Genscape.

A Reuters survey showed U.S. crude inventories likely rose for the 15th straight week, adding nearly 3 million barrels last week, less than a reading by industry group American Petroleum Institute that showed a stock build of 5.5 million barrels.

Official U.S. stocks data will be issued by the government’s Energy Information Administration on Wednesday. (Reuters)