Brent Oil Sinks Below $45 for First Time in Six Years on Glut

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High Supply, Low Demand and Long-Term Cheap Oil

Crude in London slid below $45 a barrel for the first time since March 2009 on concern Chinese demand is slowing just as OPEC and the U.S. expand a global glut.

Brent oil tumbled 6.1 percent, extending last week’s 7.3 percent drop. Commodities sank to the lowest in 16 years as forecasts for the weakest Chinese growth since 1990 spurred investors to seek out the safest assets. The Standard & Poor’s 500 energy index declined as much as 6 percent.

Iran’s Oil Minister Bijan Namdar Zanganeh vowed to expand output “at any cost.” In the U.S., the number of active oil rigs rose for the seventh time in eight weeks.

Oil’s worsening global surplus has driven prices down by more than 30 percent since May. Iran aims to expand its share of output in the Organization of Petroleum Exporting Countries, while America’s crude supplies are almost 100 million barrels above the five-year seasonal average.

“We’re trading at 6 1/2 year lows and have further to go,” Bob Yawger, director of the futures division at Mizuho Securities USA in New York, said by phone. “The risk-off scenario continues to play out. The statements from the Iranian oil minister about fighting for market share didn’t help.”

Commodity Rout

Brent for October settlement declined $2.77 to end the session at $42.69 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since March 11, 2009. Brent oil closed at a $4.45 premium to West Texas Intermediate, the U.S. benchmark.

Iran oil production in Mahshahr, Khuzestan province, southern Iran.
Iran oil production in Mahshahr, Khuzestan province, southern Iran.
Photographer: Kaveh Kazemi/Getty Images

WTI for October delivery dropped $2.21, or 5.5 percent, to $38.24 a barrel on the New York Mercantile Exchange. It was the lowest settlement since Feb. 18, 2009. Prices have decreased the past eight weeks, the longest retreat since 1986. Total volume was 22 percent above the 100-day average at 2:44 p.m.

The Bloomberg Commodity Index of 22 raw materials fell as much as 3 percent to the lowest level since August 1999 as China’s economic slowdown exacerbates surpluses from oil to metals. The index is a measure of returns that takes into account the loss or gain from holding futures contracts as well as the performance of the underlying commodities.

Crude’s slump triggered losses in related equities. Oil and natural gas producers and refiners plunged to the lowest in almost four years amid the wave of selling. Exxon Mobil Corp., the largest U.S energy producer, fell as much as 7.7 percent to $66.55 a share, the lowest since October 2010.

Iranian Strategy

Iran was OPEC’s second-largest producer before sanctions over its nuclear program were tightened in mid-2012. “We will be raising our oil production at any cost and we have no other alternative,” Zanganeh said, according to his ministry’s news website.

OPEC has pumped above its quota of 30 million barrels a day for more than a year, according to data compiled by Bloomberg. Saudi Arabia and Iraq were the group’s top producers in July.

“We’re about 1.5 million barrels a day oversupplied right now,” Paul Sankey, an energy analyst at Wolfe Research LLC, said on Bloomberg Radio. The Saudis would have made cuts to balance the market in the past but now “they are worried about Iran.”

In the U.S., rigs drilling for oil climbed by 2 to 674 last week, according to Baker Hughes Inc., an oilfield-services company. That’s the highest level since May 1.

Speculator Bets

Hedge funds cut bullish bets on WTI to the lowest level in five years in the week ended Aug. 18, U.S. Commodity Futures Trading Commission data show. Money managers raised their net bullish Brent wagers during the same period by 13,977 contracts, according to data from ICE.

“We could have a bit more downside here, especially given the macro picture,” Katherine Spector, a commodities strategist at CIBC World Markets in New York, said by phone. “We’re very short, so the end of the correction may be near.”

September gasoline futures tumbled 7.39 cents, or 4.8 percent, to $1.471 a gallon, the lowest close since Jan. 30. Diesel for September delivery fell 6.95 cents, or 4.8 percent, to $1.3929, the lowest settlement since May 2009.

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