Brent Oil Falls Most in 5 Months on Glut as Volatility Surges

Commodities: What Comes Next to Move Markets?
  • IEA raises surplus oil-supply estimate on higher OPEC output
  • Goldman sees more oil swings that could drag prices below $20

Crude tumbled the most in five months in London as price volatility climbed to a seven-year high and Goldman Sachs Group Inc. warned of wider swings to come.

Brent futures fell 7.8 percent as global equities neared a bear market. Volatility is set to “spike” as prices seek an equilibrium, which could drag oil below $20 a barrel, Goldman Sachs said. The CBOE Crude Oil Volatility Index, which measures expectations of price swings, rose as high as 73.52, almost the highest since 2009. The world oil surplus will be bigger in the first half of this year than previously estimated, according to the International Energy Agency.

"The IEA data shifted attention back to the global glut," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "It dashed any hopes of supply and demand coming into balance anytime soon."

Oil is down about 25 percent in New York this year on speculation a global glut will persist amid the outlook for increased exports from Iran after the removal of sanctions and brimming U.S. crude supplies. Futures dropped to a 12-year low of $26.19 in January. U.S. crude inventories rose above 500 million barrels to the highest since 1930 in the week ended Jan. 29.

Brent for April settlement dropped $2.56 to $30.32 a barrel on the London-based ICE Futures Europe exchange. It was the biggest decline since Sept. 1. The European benchmark crude closed at a 58-cent premium to West Texas Intermediate oil for April delivery.

Excess Supply

WTI for March delivery slipped $1.75 to settle at $27.94 a barrel on the New York Mercantile Exchange. It was the lowest close since Jan. 20. Total volume traded was 76 percent higher than the 100-day averageat 4:45 p.m.

After futures settled, the American Petroleum Institute was said to report U.S. crude supplies climbed 2.4 million barrels last week . WTI traded at $28.33 at 4:45 p.m.

The MSCI All-Country World Index was 18 percent lower from a May record, while the Standard & Poor’s 500 Index touched a 22-month low on doubts about the strength of the worldwide economy, before rebounding by less than 1 percent in the afternoon.

"Growing fears of a global recession and what that would mean for demand are sending the market lower," said Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami. "If there is a global recession, our target is for $16 crude."

Supply may exceed demand by an average of 1.75 million barrels a day in the first half of the year, compared with last month’s estimate of 1.5 million, and the excess could swell if the Organization of Petroleum Exporting Countries boosts output, the IEA said in its monthly oil market report Tuesday. Iran raised production in January as sanctions were lifted, Iraq pumped at a record pace and Saudi Arabia boosted output. The IEA cut global demand estimates.

Volatility Spike

“Volatility’s likely to spike here,” Goldman Sachs’s head of commodities research Jeff Currie said in a television interview. Prices will swing between $20 and $40 a barrel for the next six to nine months, potentially dipping “into the teens” as the global surplus pressures some producers to halt output.

U.S. crude inventories probably rose by 2.85 million barrels last week, according to a Bloomberg survey before an Energy Information Administration report Wednesday. Gasoline inventories probably climbed 1 million barrels.

U.S. shale fields are pumping more oil and gas than previously estimated, according to the EIA’s Drilling Productivity Report. The seven major shale formations in the U.S. will produce 5.02 million barrels a day in February, up from last month’s forecast of 4.83 million a day, the EIA report released Monday showed.

Very Ugly

"This is looking very ugly," said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. "We’re headed for $25 and potentially it will break through."

March gasoline futures dropped 6 percent to 89.89 cents a gallon, the lowest settlement since December 2008. Diesel for March delivery declined 6.8 percent to 97.49 cents.

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