Oil Falls to Two-Week Low as U.S. Stockpiles Seen Nearing Record

Why Oil Still Matters to the Markets
  • U.S. crude supply probably rose 500,000 barrels, survey says
  • Saudi Arabia-Iran tensions ramp up as relations downgraded

Oil dropped to a two-week low on speculation that a government report will show U.S. crude inventories climbed last week.

Futures tumbled 2.1 percent in New York. Stockpiles probably rose the 13th time in 15 weeks, keeping them more than 130 million barrels above the five-year average, according to a Bloomberg survey. However, the American Petroleum Institute’s weekly report Tuesday showed stockpiles falling. The Energy Information Administration will release its data Wednesday. Supplies at Cushing, Oklahoma, the biggest U.S. storage hub, climbed to a record last month, according to the EIA.

Prices are being pressured by concerns the weekly data will show supplies rose from what was already an all-time high, said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "Nationwide, supplies probably rose last week, narrowing the gap on the all-time record."

Oil capped the biggest two-year loss on record in 2015 as the Organization of Petroleum Exporting Countries effectively abandoned production limits amid a global supply glut. Investors are assessing the impact of Saudi Arabia’s move to cut ties with Iran, while also watching measures by China to prevent the country’s financial-market volatility from weighing on a slowing economy.

West Texas Intermediate for February delivery fell 79 cents to settle at $35.97 a barrel on the New York Mercantile Exchange. It was the lowest close since Dec. 21. Prices slid 30 percent last year.

Losses eased after the API was said to report U.S. crude supplies fell 5.6 million barrels last week while Cushing inventories rose by 1.37 million barrels. WTI traded at $36.13 at 4:44 p.m.

Brent for February settlement declined 80 cents, or 2.1 percent, to $36.42 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at 45 cent premium to WTI.

Ample Inventories

Oil also fell as the U.S. dollar climbed, diminishing the appeal of commodities denominated in the currency. The Bloomberg Dollar Index, which tracks the currency against major peers, rose to the highest in data going back to 2005.

U.S. crude stockpiles probably rose 500,000 barrels to 487.9 million last week, according to the median estimate in a Bloomberg survey. An advance above the 490.9 million reached in April would leave supplies the highest since 1930, according to weekly and monthly data from the EIA. Inventories of gasoline and distillate fuel, a category that includes diesel and heating oil, are also projected to have increased

Crude inventories at Cushing, the delivery point for WTI, climbed to 63 million barrels in the week ended Dec. 25. The hub has a working capacity of 73 million barrels, according to the EIA.

Limited Capacity

"We only had 10 million barrels of capacity left at Cushing in last week’s report," Yawger said. "Once we get to capacity of 73 million barrels, I don’t know where you’ll put the stuff. Things will get ugly."

On Sunday, Saudi Foreign Minister Adel al-Jubeir gave Iran’s ambassador 48 hours to leave Riyadh following an attack on the Saudi embassy in Tehran by demonstrators protesting the execution of a Shiite cleric. Bahrain also severed diplomatic relations with Iran, while the United Arab Emirates reduced its diplomatic representation and Kuwait recalled its ambassador.

While moves to isolate Iran raise the specter of deepening conflicts in the Middle East, the impact on oil prices is limited because of the global surplus, according to Macquarie Group Ltd. and FGE, an industry consultant. Citigroup Inc. described the tensions as “indeterminate” for oil markets in the near term, saying there’s less chance that the Saudis will cut crude output ahead of Iran’s return to the market following the removal of international sanctions.

Saudi Production

"The conflict between Iran and Saudi Arabia will add to the downward pressure on oil prices as they produce as much as possible as they try to hurt each other," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

Saudi Arabia won’t limit production and will seek to supply any demand from the market, Ali Al-Naimi, the country’s oil minister, said Dec. 30 on state television. The kingdom pumped 10.25 million barrels of oil a day in December, helping to keep daily OPEC output above 32 million barrels for a seventh month, according to data compiled by Bloomberg.

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