Oil prices skid on profit booking, supply risk holds losses

Oil prices dropped on low volumes as investors preferred to book profit to take advantage of overnight rally. The oil price is hovering above $50 a barrel on disruption in production in Brazil and Libya.

However, the adverse conditions in Brazil and Libya restricted losses. After a series of negative developments, China recorded encouraging performance from its services sector during the quarter and this brought some cheer to the market.

Analysts feel that chances are bleak for year-end rally.

Brent futures for December delivery fell 13 cents to $50.41 a barrel after rising $1.75 or 3.6 percent in the previous session.

After the good rally, investors were taking some short-term positions, say market strategists, who forecast prices may drop further and then market is likely to remain range-bound. Oil prices are supported by fears of supply disruptions.

China services sector recorded encouraging growth during the quarter ending October. This eased some of the concerns that have been daunting the markets for some time.

The market sentiment in China was further affected negatively following the discouraging numbers from the manufacturing sector.

Despite surge in US inventories, Opec (Organization of Petroleum-Exporting Countries) is continuing its production levels. Opec is against cutting down in production levels.

However, economists are clueless whether the services sector growth is big enough to boost the demand in China, which is world's largest consumer of energy, metals and other commodities.

ANZ in its research note predicted that year-end recovery in commodity prices may not take as usual. In addition to oil production and supply factors, several other key developments are also influencing oil prices.

For instance, US dollar is surging, while Chinese economy weakening. This would put some more pressure on oil prices.

The Caixin/Markit Purchasing Managers' Index (PMI) rose to 52.0 in October from September's 14-month low of 50.5, hitting the highest level since July 2015, although business expectations moderated to a record low in October.

The ongoing strike at Petrobras in Brazil and closure of Libyan oil export terminal at Zueitina are supporting prices not to fall. Brazil is the world's ninth-largest oil producer.

The Petrobras strike resulted in a slowdown in global oil production by 25 percent.

On the other side, crude inventories in the US are building up. Crude stocks were up by 2.8 million barrels as on 30 October to 479.9 million, according to data from American Petroleum Institute.

The US Department of Energy's inventory data is expected to give much more clarity at this juncture.

Oil price was at high of $114/barrel in June 2014 and now is hovering just above $50 per barrel. Despite the huge drop in oil price, the OPEC, led by Saudi Arabia, is declining to reduce production levels, and in fact, exceeding its ceiling of 30 million barrels a day.