Oil Falls as U.S. Fuel Supply, China Turmoil Add to Glut Concern

Oil's Summer of Suffering Leads Commodities Rout
  • Fuel stockpiles increase as crude inventories decline
  • Futures remain more than 35 percent lower than June peak

Oil slipped as rising U.S. fuel stockpiles and further declines in China’s equity market fanned concern that demand may slow while global crude markets remain oversupplied.

Gasoline futures slumped to a seven-month low after an Energy Information Administration report showed that U.S. inventories climbed, while crude stockpiles declined by 5.45 million barrels last week. Equities in China, the biggest oil consumer after the U.S., closed lower to cap their worst five-day rout since 1996.

Oil’s fall since this year’s peak in June has deepened to more than 35 percent amid a global commodities rout. The Bloomberg Commodity Index of 22 raw materials including crude and metals dropped to a 16-year low.

"The market ignored the crude supply drop because the barrels were transformed into fuel," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. "Overall petroleum stocks rose."

West Texas Intermediate for October delivery dropped 71 cents, or 1.8 percent, to settle at $38.60 a barrel on the New York Mercantile Exchange. The contract closed at $38.24 on Monday, the lowest settlement since February 2009. Prices have dropped 28 percent this year.

2008 Lows

Brent for October settlement declined 7 cents to end the session at $43.14 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $4.54 premium to WTI.

"We dropped to $32.40 in December 2008 and that’s got to be our next technical target unless something happens in Iran, Iraq or Saudi Arabia that cuts supply," Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said in an interview.

Speculation that China’s policy makers are struggling to prevent a hard landing in the world’s second-largest economy has convulsed global markets, triggering a rush from all but the safest of assets. The Shanghai Composite Index fell 1.3 percent, extending a 20 percent decline this month.

"Concerns about China are the main factor guiding this market," said Adam Wise, who helps run a $7 billion oil and gas bond and private equity portfolio as a managing director at John Hancock in Boston. "We’re paying more attention to the demand side of the equation. This will only change when we get sustained crude supply draws."

U.S. Stockpiles

Crude inventories in the U.S. dropped to 450.8 million barrels last week, EIA said. Supplies remain almost 100 million barrels above the five-year seasonal average.

Gasoline supplies rose 1.66 million barrels to 214.4 million. Demand for the motor fuel averaged over four weeks declined 37,000 barrels a day to 9.57 million. The summer driving season, when U.S. fuel consumption typically peaks, will end with Labor Day on Sept. 7.

September gasoline futures decreased 8.37 cents, or 5.8 percent, to $1.3549 a gallon, the lowest close since Jan. 29. 

Enough Gasoline

"Gasoline is down because inventories rose at a time of year when they are supposed to go down," Evans said. "It’s clear that we have enough gasoline to carry us through the end of the summer driving season."

Inventories of distillate fuel, a category that includes diesel and heating oil, increased 1.44 million barrels to 149.8 million, rising a 14th week, which is the longest stretch of advances since 2005.

Diesel for September delivery slipped 1.43 cents, or 1 percent, to $1.3809, the lowest settlement since April 2009.

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