Oil Drops to 6-Year Low as Rising Rig Count Seen Adding to Glut

Gheit: Oil Will Hit $60, But It Will Hurt
  • U.S. oil rig count rises by 17 to 541 this week: Baker Hughes
  • Crude stockpiles highest for this time of year since 1930: EIA

Crude slid to the lowest level in more than six years in New York as a rising number of oil rigs in the U.S. signaled the supply glut will be prolonged.

Futures capped a third weekly drop after Baker Hughes Inc. reported that the number of active oil rigs in the U.S. climbed by 17 this week to 541. U.S. crude supplies surged to 490.7 million barrels, the most for this time of year since 1930, according to the Energy Information Administration. Goldman Sachs Group Inc. warned of “high risks” that prices may sink further as stockpiles swell.

QuickTake Oil Prices

Oil is trading at levels last seen during the global financial crisis on signs the surplus will be exacerbated. The Organization of Petroleum Exporting Countries abandoned output limits at a Dec. 4 meeting while the U.S. Federal Reserve increased interest rates this week, boosting the dollar and reducing the appeal of commodities traded in the U.S. currency. Both houses of Congress approved on Friday a $1.1 trillion spending measure that would end a 40-year-old ban on most crude exports.

“This is a huge glut and there’s no relief in sight," Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, said by phone. "We got within $1.89 of the 2009 low of $32.40 today. That’s got to be the target now and we’ll probably soon test it."

New Lows

West Texas Intermediate for January delivery fell 22 cents, or 0.6 percent, to close at $34.73 a barrel on the New York Mercantile Exchange. It was the lowest settlement since February 2009.  The volume of all futures traded was 16 percent above the 100-day average at 2:45 p.m. Prices have dropped 35 percent this year and are heading for a second annual decline

Brent crude for February settlement dropped 18 cents, or 0.5 percent, to $36.88 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since December 2008. The European benchmark oil closed at a 82-cent premium to the February WTI contract. 

"We’re heading into what should be a very volatile week," Schork said. "Everyone will be in bonus protection mode through the end of the year."

The spread between Brent and WTI has narrowed amid speculation that the U.S. plan to allow domestic oil to be shipped overseas may ease the nation’s oversupply. Crude inventories have expanded to 130 million barrels above the five-year seasonal average, EIA data showed Wednesday.

Bulging Tanks

Oil-storage tanks could reach their capacity, pushing prices down to levels necessary to force an immediate halt to some production, Goldman Sachs said in a report Thursday.

Sixteen of 30 analysts and traders, or 53 percent, were bearish on WTI in a Bloomberg survey Thursday. Eight respondents were bullish and six were neutral.

Gasoline closed higher as low prices spur demand and supplies trail year-earlier levels. Stockpiles of the motor fuel rose to 219.4 million barrels in the week ended Dec. 11, down from 222 million during the same period in 2014, EIA data show.

"Gasoline values are holding up well compared with crude," Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone. "While crude oil supplies are near all-time highs gasoline stocks still trail last year’s levels. This divergence is reflected in the price."

January gasoline futures rose 1 percent to $1.2746 a gallon, the highest close in a week. Diesel for January delivery rose 0.2 percent to settle at $1.1071 a gallon.

Pump prices fell 0.3 cent to average $2.004 a gallon Thursday, the lowest since March 2009, data compiled by Heathrow, Florida-based AAA show.

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