U.S. Crude Futures Fall to 3-Year Low on Saudi Price Cut

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West Texas Intermediate crude dropped to a three-year low as Saudi Arabia cut prices for exports to U.S. customers amid speculation stockpiles increased last week. Brent fell to a four-year low in London.

Oil plunged deeper into a bear market on speculation the largest producers in OPEC are keener on preserving market share rather than propping up prices. U.S. oil output has jumped to the highest in three decades, Russia is pumping the most since the fall of the Soviet Union and Libyan production is recovering while oil demand forecasts have been revised down.

“People are panicking,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion. “There is this pervasive belief that the Saudis are in a market-share war.”

WTI for December delivery fell $1.59, or 2 percent, to $77.19 a barrel on the New York Mercantile Exchange, the lowest settlement since Oct. 4, 2011. The volume of all futures traded was 52 percent above the 100-day average. Front-month WTI swung to a discount, or contango, yesterday versus the second month for the first time since April.

Prices pared losses after the American Petroleum Institute said inventories dropped 640,000 barrels last week, according to Bain Energy. Futures were down 1.7 percent at $77.41 in electronic trading at 4:43 p.m.

Brent for December settlement declined $1.96, or 2.3 percent, to $82.82 a barrel on the London-based ICE Futures Europe exchange, the lowest close since Oct. 21, 2010. Volume was 27 percent above the 100-day average. The European benchmark crude traded at a premium of $5.63 to WTI on ICE. The spread widened for a fourth day to close at $6 yesterday.

Resisted Calls

Oil slid in October by the most since May 2012 as leading members of the Organization of Petroleum Exporting Countries resisted calls to cut output. Gasoline futures tumbled to the lowest since 2010 today.

The U.S. administration is “closely and continuously monitoring” the decline in oil prices, White House spokesman Josh Earnest said today at a regular briefing.

Saudi Arabian Oil Co. reduced December differentials for all grades it ships to the U.S. yesterday and increased the spreads for supplies to Asia and Europe.

“The market continues to interpret OSP reductions negatively,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy. “Without any explicit communication by OPEC members, in particular Saudi Arabia, relative to their future output policy, the market is just latching on to the next available signal, in this case OSP decisions.”

Cut Premium

Saudi Arabia, OPEC’s largest producer, reduced the premium of Arab Light to U.S. Gulf Coast benchmarks by 45 cents a barrel to the lowest level this year. Discounts for Medium and Heavy grades were widened for a fourth month, according to Saudi Aramco, the state oil company.

Saudi Aramco surprised traders last month when it trimmed crude levels, known as official selling prices or OSPs, to six-year lows for buyers in Asia. Aramco increased the cost to Asia and Europe yesterday.

“It shows that Saudi Arabia really wants to keep their market share,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “There is no indication that they are going to do a supply cut.”

OPEC, responsible for about 40 percent of the world’s oil supply, is scheduled to discuss output policy at a Nov. 27 meeting in Vienna. Its 12 members are producing more than their collective target of 30 million barrels a day, which has been maintained since January 2012.

Shale Boom

The Saudi price cut came as U.S. supplies increased amid rising production from shale formations. Crude inventories rose to 379.7 million barrels in the week ended Oct. 24, the highest level since July, the Energy Information Administration, the Energy Department’s statistical arm, said last week. U.S. stocks climbed by 2.35 million barrels last week, a Bloomberg News survey showed before a government report tomorrow.

“When you really look around, you still have too much crude,” said Michael Hiley, head of energy OTC at LPS Partners Inc. in New York. “You have to look at this as a continuation of the trend, not what happened today or yesterday.”

U.S. production advanced to 8.97 million barrels a day in the week ended Oct. 24, the highest in data going back to January 1983, according to EIA estimates.

“There are good reasons to be concerned about commodities in general and oil in particular,” O’Grady said. “We have rising production and slowing global growth.”

Gasoline futures dropped 1.9 percent to $2.078 on the Nymex, the lowest since October 2010.

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