Oil Prices Near Six-Year Lows on Oversupply Fears
Increased stockpiles and worries over China’s demand feed bearish momentum
Oil prices dropped toward six-year lows Thursday on concerns that the global crude glut will worsen when the U.S.’s busy summer-driving season comes to a close.
Prices have slid since the end of June as a result of high levels of crude production in the U.S. and other major suppliers, worries about weaker Chinese consumption and a strong dollar.
Traders are looking ahead to the fall, when gasoline demand typically declines as drivers take fewer vacations. That’s also when refineries buy less crude oil as they shut down units for repairs.
“You’re not seeing anything out there that is giving you respite,” said Ric Navy, senior vice president for energy futures at brokerage R.J. O’Brien & Associates LLC. Despite robust global demand for fuel, especially gasoline, “supply is still outstripping it.”
Oil prices last hit six-year lows in March, the nadir of a historic selloff that brought prices down nearly 60% in nine months. Fueling the declines were rising production in the U.S. and a decision by the Organization of Petroleum-Exporting Countries to maintain output at relatively high levels.
Oil prices on Thursday fell 49 cents, or 1.1%, to $44.66 a barrel on the New York Mercantile Exchange, the lowest settlement since March 19. Prices are less than $2 a barrel above the six-year low of $43.46, reached on March 17.
Analysts and Wall Street banks called for lower prices in early 2015, only to be caught off-guard by oil rallying past $60 a barrel in the second quarter. Now, many of these analysts are taking a victory lap. Many market watchers said the price gains earlier in the year were driven by short-term investors, rather than by supply and demand, and that the rally wasn’t sustainable.
Brent, the global benchmark, fell 7 cents, or 0.1%, to $49.52 a barrel on ICE Futures Europe.
The recent drop in U.S. crude prices, which are down 27% since hitting their high for the year in June, has rattled broader financial markets. The energy sector of the S&P 500, while up slightly on Thursday, has fallen 15% on the year and dragged down the broader index amid sharp drops in oil and gas producers’ earnings.
U.S. drivers are seeing renewed savings at the pump. Retail gasoline prices have fallen for 17 straight days, according to AAA. The national average price of gasoline, at $2.62 a gallon, is the lowest for this time of year since 2009, and AAA expects prices to drop further by Labor Day.
Goldman Sachs analysts, who had called for prices to fall to $45 a barrel by October, said in a client note Thursday that the global crude market is currently oversupplied by two million barrels a day, up from 1.8 million barrels a day in the first half of the year. The bank warned that prices could fall further.
“The rebalancing of supply and demand will likely prove to be far more difficult than what was previously priced into the market,” Goldman said. “This is all in line with our lower-for-longer view.”
Robust gasoline demand helped boost oil prices earlier in the spring, but the U.S. Energy Information Administration reported on Wednesday that gasoline inventories unexpectedly rose last week. The rise sparked concerns that refineries are producing a surplus of the fuel. Inventories of gasoline usually fall at this time of year as refiners sell summer-grade fuel to make room for winter-grade gasoline.
The EIA also estimated that crude-oil production rose last week, weighing on prices. EIA data released last week showed U.S. crude output peaked in March and fell slightly in April and May because of a massive cutback in new drilling due to lower oil prices. However, analysts remain divided about how quickly production will fall and for how long.
“North American producers are more resilient than everyone thought they would be,” said Matthew Perry, partner at Kronenberg Capital Advisors LLC, which oversees $30 million. “We think the supply glut’s here to stay for quite some time.”
Kronenberg has bet oil prices would fall since November 2014, Mr. Perry said, adding he thinks prices could fall to the mid-$30s.
Gasoline futures settled down 2.27 cents, or 1.4%, at $1.6478 a gallon, the lowest settlement since February. Diesel futures rose 1.14 cents, or 0.7%, to $1.5499 a gallon.
Source: WSJ – Oil Prices Near Six-Year Lows on Oversupply Fears
