Oil Falls to Two-Week Low as U.S. Supply Gain Seen, Dollar Rises

How Oil Plays Into the Fed's Inflation Expectations
  • Crude stockpiles climbed 1.3 million barrels: Bloomberg survey
  • Commodities drop, dollar rises to one-month high versus peers

Oil dropped to a two-week low before a government report that’s projected to show U.S. crude stockpiles increased, while a strengthening dollar weighed on commodities.

Crude supplies probably climbed by 1.3 million barrels last week, a Bloomberg survey showed before an Energy Information Administration report on Wednesday. The dollar rose to the highest in more than three weeks, curbing the appeal of raw materials denominated in the currency to investors. Iran aims to raise oil output to 4 million barrels a day by the end of 2016, Mansour Moazami, deputy minister of industry, mines and trade said in Norway.

Oil entered a bull market Aug. 18, less than three weeks after tumbling into a bear market, as prices surged partly on speculation that talks in Algeria next month among members of the Organization of Petroleum Exporting Countries may result in action to stabilize the market. A deal to freeze output was proposed in February but a meeting in April ended with no final accord.

"The dollar should keep rising and commodities are likely to continue moving lower," said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida. "Crude supplies are going to rise as we go into turnaround season."

West Texas Intermediate for October delivery declined 63 cents, or 1.3 percent, to settle at $46.35 a barrel on the New York Mercantile Exchange. It’s the lowest close since Aug. 15. Total volume traded Tuesday was 18 percent below the 100-day average at 4:42 p.m.

Dollar Strength

Futures were little changed from the settlement after the industry-funded American Petroleum Institute was said to report U.S. crude supplies rose 942,000 barrels last week. WTI traded at $46.29 at 4:41 p.m in New York.

Brent for October settlement, which expires Wednesday, decreased 89 cents, or 1.8 percent, to $48.37 a barrel on the London-based ICE Futures Europe exchange. It’s also the lowest close since Aug. 15. The global benchmark crude ended the session at a $2.02 premium to WTI.

The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, rose as much as 0.7 percent to the highest level since Aug. 5 on mounting speculation the Federal Reserve will raise interest rates this year after Fed Chair Janet Yellen’s remarks last week.

U.S. crude inventories expanded by 2.5 million barrels to 523.6 million through the week ended Aug. 19, according to EIA data. Crude stockpiles are at their highest seasonal level in more than two decades. Refineries plan maintenance programs for September and October when fuel demand is lower. Over the past five years, refiners’ thirst for oil has dropped an average of 1.2 million barrels a day from July to October.

Global Oversupply

“Last week, we had a huge number of crude oil imports going into" the eastern U.S., and "the market was interpreting that as the global oversupply is now pressuring inventory builds in the U.S., more so now,” said Michael Loewen, commodities strategist at Scotiabank in Toronto. If the EIA data shows another large increase in imports, “that’s another bearish situation.”

Iraq would support a proposal for OPEC and other major oil producers to freeze output at talks in Algeria next month, Prime Minister Haidar Al-Abadi said in Baghdad. The endorsement marks a slight shift by Al-Abadi, who was quoted by Reuters on Aug. 23 saying that Iraq still hadn’t raised production sufficiently. The country’s deputy oil minister, Fayyad Al-Nima, said the following day that Iraq would support measures to establish fair crude prices.

“There is a whole slew of indications on the fundamental side that we should effectively be lower,” said Harry Tchilinguirian, head of commodities research at BNP Paribas SA in London. “In the absence of any new supply disruption and in the absence of any progress in the supposed producer dialogue that will take place in Algiers, the market could easily retrace a few dollars.”

Oil-market news:

  • Storms in the Gulf of Mexico have shut 22% of Gulf of Mexico oil production, according to the U.S. Bureau of Safety and Environmental Enforcement on Tuesday.
  • It may take time for oil markets to strengthen and there will be great uncertainty in the meantime, Statoil ASA Chief Executive Officer Eldar Saetre said in an interview in Stavanger, Norway.
  • Iran will invite international oil companies to submit bids in October under the new contract model for energy investors, National Iranian Oil Co. said, according to state news agency IRNA.
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