Oil Retreats to Bear Market as Global Supply Glut Seen Growing

Oil in Bear Market: Three Charts That Tell the Story
  • Saudi Arabia lowers prices to Asia in fight for market share
  • U.S. oil rig count expands for fifth week to 374: Baker Hughes

Oil fell below $40 a barrel in New York for the first time since April, falling into a bear market on concern that the global supply glut will expand.

Saudi Arabia cut prices to Asian customers as the country continues to fight for market share. Drillers in the U.S. boosted the number of rigs seeking oil for a fifth week, the longest run of gains since last August, according to data from Baker Hughes Inc. U.S. crude and gasoline supplies are at the highest seasonal level in at least two decades. West Texas Intermediate settled 22 percent below its June peak Monday, meeting the common definition of a bear market.

"We got here on the back of excessive storage in crude oil and gasoline," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "The storage levels are so out of whack."

Oil has tumbled from its $51.23 June peak, ending a recovery that saw prices almost double from a 12-year low in February. The persistence of the supply overhang is upsetting industry expectations, with BP Plc, Royal Dutch Shell Plc and Exxon Mobil Corp. reporting second-quarter earnings last week that were worse than estimated.

WTI for September delivery dropped 3.7 percent Monday to close at $40.06 a barrel on the New York Mercantile Exchange. It was also the first settlement below 200-day moving average since April, adding to the bearish pressure.

QuickTake Why Oil Goes Up and Down

Brent for October delivery fell 3.2 percent to $42.14 a barrel on the London-based ICE Futures Europe exchange, the lowest close since April 7. The global benchmark settled at a premium of $1.30 to WTI for October delivery.

Global Glut

State-owned Saudi Arabian Oil Co. said Sunday it will sell cargoes of Arab Light in September at $1.10 a barrel below Asia’s regional benchmark. That is a pricing cut of $1.30 from August, the biggest drop since November, according to data compiled by Bloomberg.

The U.S. oil drilling rig count climbed by 3 to 374, the highest level since March, Baker Hughes said Friday. The nation’s crude inventories rose to 521.1 million barrels through July 22, keeping supplies more than 100 million barrels above the five-year average, Energy Information Administration data show.

Demand for crude is set to decline in the next few months. U.S. refineries typically reduce operating rates to perform seasonal maintenance as the summer driving season comes to an end, after the Labor Day holiday in early September.

"I think the market is going down in anticipation that summer is about to come to an end," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.9 billion. "There is a very strong historical trend for gasoline consumption to start to trail off once you get to Labor Day."

Gasoline for September delivery slipped 1.6 percent to $1.3036 a gallon, the lowest close since March 3. September diesel futures dropped 3.8 percent to $1.2579, the lowest settlement since April 18.

For a story on slowing seasonal demand in the U.S., click here.

Libya’s state crude producer is working to resume oil shipments from three ports after a deal was struck to settle payments to local guards. The move may triple production but only after blockades on oil fields that supply the ports are lifted. National Oil Corp. “will now start working” with the unity government to restart exports from the ports of Ras Lanuf, Es Sider and Zueitina, according to an e-mailed NOC statement.

"We have more than ample supply around the world," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut. "We’ve lost half of our spring rally."

Energy companies dominated the biggest losers in the Standard & Poor’s 500 Index, with Exxon and Chevron Corp. both falling more than 3 percent.

Oil-market news:

  • Hedge funds increased their short positions in WTI by 38,897 futures and options combined during the week ended July 26, the biggest gain in data going back to 2006. Brent net-long positions extended their pullback for a seventh week.
  • The current downward correction in oil prices will bottom out in the high-$30 range, said Societe Generale SA.
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