Oil Tumbles on Estimates U.S. Crude Supply Gained a Second Week

Will Oil Price Increase or Is Rally Short-Lived?
  • U.S. crude inventories probably expanded for a second week
  • Societe Generale and EIA reduce crude price projections

Oil tumbled as estimates that U.S. crude stockpiles rose reinforced worries that there’s no end in sight for the global supply surplus.

West Texas Intermediate and Brent futures both dropped 3.9 percent. U.S. inventories probably climbed by 900,000 barrels last week, according to a Bloomberg survey before government data is released Thursday. Societe Generale SA and the Energy Information Administration both cited production outpacing demand when they cut their crude price forecasts Wednesday for this year and 2016.

Oil has fluctuated since dipping below $40 more than two weeks ago as concern over China’s slowing economy and weakening demand weighed on global markets. Investors bailed out of the U.S. Oil Fund last week at the fastest pace since its inception in 2006 amid a surge in volatility. The EIA cut the U.S. crude production estimate for the year in its Short-Term Energy Outlook, but still expects output to be the highest since 1972 before declining in 2016.

"The market is under pressure because that’s what is needed to rebalance it going forward," Mike Wittner, head of oil-market research at Societe Generale in New York, said by phone. "Falling prices will eventually lead to lower production and a better-balanced market, but it’s a long slow process." The Short-Term Outlook Wednesday "showed that it’s starting to happen."

Volatile Market

WTI for October delivery declined $1.79 to settle at $44.15 a barrel on the New York Mercantile Exchange. Prices have dropped 17 percent this year.

Futures extended losses after the American Petroleum Institute was said to report U.S. crude supplies rose last week. Stockpiles climbed 2.14 million barrels, tweets show. The contract traded at $44.11 at 4:38 p.m.

Brent for October settlement decreased $1.94 to end the session at $47.58 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $3.43 premium to WTI.

Societe Generale said WTI will average $49.40 a barrel in 2016, down $5.65 from it’s prior forecast. Brent will average $54.40 next year, also a $5.65 reduction from the bank’s previous projection. The EIA said WTI will average $53.57 next year, down from an estimate of $54.42 in August, while its Brent price forecast was reduced to $58.57 from $59.42.

New Signals

"It looks like there was a supply build last week, which is negative for the market," Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut, said by phone. "We’re looking for new signals on the economic situation in China and what that will mean for global demand. We’re also waiting to see what impact lower prices will have on U.S. production."

U.S. crude inventories probably advanced for a second week to 456.3 million barrels through Sept. 4, according to the Bloomberg survey. That would keep inventories almost 100 million barrels above the five-year seasonal average.

Refineries in the U.S. probably reduced operating rates for a fourth week, the survey showed. The nation’s refiners cut operating rates during September in nine of the past 10 years as gasoline demand slips with the end of summer’s driving season on Labor Day.

Bearish Sentiment

"Sentiment is bearish now that refineries are entering maintenance and the driving season is over and done with," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. "We’re looking for weak crude demand for a couple months."

Investors sold back a net total of 19.3 million shares in the biggest exchange-traded fund that tracks oil, a weekly record since its inception in 2006, according to data compiled by Bloomberg. Total shares outstanding dropped to 176 million on Sept. 4, the lowest since Aug. 11.

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