Oil Falls the Most in Two Months After Biggest Gain in 25 Years

What's Behind the Whipsaw Moves in Oil Prices?
  • U.S. crude stockpiles forecast to increase by 900,000 barrels
  • China official factory gauge shrinks to lowest in 3 years

Oil fell the most in two months, paring the biggest three-day rally in 25 years as speculation faded that OPEC might coordinate with other nations to curb supply.

Futures slipped 7.7 percent in New York after surging 27 percent in three days, the most since August 1990. Prices fell as Chinese manufacturing slowed and U.S. crude stockpiles were forecast to have increased. They rose on Monday after the U.S. lowered production estimates and OPEC said it’s prepared to discuss “fair” prices with other producers, but the group also said it won’t shoulder the burden of propping up prices on its own.

Crude will remain at $40 to $60 a barrel into 2016 as rising supplies outpace demand, according to Ian Taylor, chief executive officer of Vitol Group BV, the biggest independent oil trader. Iran plans to boost output by 1 million barrels a day within five months after sanctions against it are lifted, said Oil Minister Bijan Namdar Zanganeh.

“This market is primed for volatility,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $128 billion of assets. “I see us moving lower because there continues to be an overabundance of oil and that’s not going to change anytime soon. It’s hard to see the market take off again.”

Inventory Forecast

West Texas Intermediate for October delivery dropped $3.79 to close at $45.41 a barrel on the New York Mercantile Exchange. The contract settled at $49.20 on Monday, the highest level since July 21. The volume of all futures traded was more than twice the 100-day average.

Futures extended losses after the American Petroleum Institute was said to report U.S. crude supplies rose last week. Stockpiles climbed 7.6 million barrels, tweets show. The contract traded at $44.59 at 4:41 p.m.

Brent for October settlement decreased $4.59, or 8.5 percent, to end the session at $49.56 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $4.15 premium to WTI.

A drop in a Chinese factory gauge to the lowest in three years prompted speculation that growth in the world’s second-biggest oil-consuming economy is slowing. China’s official Purchasing Managers’ Index was 49.7 for August, down from 50 in July. Numbers below 50 indicate contraction.

U.S. crude inventories probably rose by 900,000 barrels last week, according to a Bloomberg survey before an Energy Information Administration report on Wednesday. A gain of that size would keep supplies more than 90 million barrels above the five-year seasonal average.

EIA Revision

The EIA reduced its U.S. crude production estimates by as much as 130,000 barrels a day for the first five months of the year based on a new survey. The nation pumped about 9.44 million barrels of crude a day during the period, down from a previous estimate of 9.53 million.

"The EIA numbers yesterday bamboozled the market and were the catalyst for the move higher," Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, said by phone. "We’re expecting a pullback in U.S. production going forward, but not from OPEC."

Non-member nations would have to contribute to any effort to bolster prices, The Organization of Petroleum Exporting Countries said in a monthly bulletin from its Vienna-based secretariat. The group said it will protect its own interests and that there is “no quick fix” for market instability.

Nothing New

"The fundamental part of the story hasn’t changed," Helima Croft, chief commodities strategist at RBC Capital in New York, said by phone. "The OPEC magazine story was treated like it was something new, but they’ve been saying since November that they wouldn’t cut alone." 

The 12-member group may shift policy and reduce output to keep Brent crude above $50 a barrel if demand in emerging economies falters, Bank of America Corp. said Aug. 28. Saudi Arabia, OPEC’s biggest member and architect of the current strategy to defend market share, “cannot sustain its spending sub-$40 a barrel for very long,” the bank said.

The oil-production surplus means stockpiles will keep expanding for “the next few quarters” and excess inventories won’t clear until 2017 at the earliest, Vitol’s Taylor said Tuesday in an interview.

The Chicago Board Options Exchange Crude Oil Volatility Index climbed to the highest level since March 17 on Tuesday. The gauge tracks hedging costs on the U.S. Oil Fund, the biggest exchange-traded fund tracking WTI.

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