Oil Falls to 6-Year Low as U.S. Crude Supply Drop Shrugged Off

  • Crude supply tumbled 7.3 million barrels on Gulf Coast: EIA
  • Diesel futures slipped to six-year low as gasoline rebounded

What Is Keeping Commodities From Hitting a Bottom?

Oil dropped to the lowest in more than six years as investors discounted a decline in U.S. crude inventories.

Crude supplies fell 3.57 million barrels last week, the U.S. Energy Information Administration reported Wednesday. Stockpiles along the Gulf Coast tumbled 7.3 million barrels, the biggest decline since December 2012. Refiners in Texas, which is located in the region, typically drain tanks in December to reduce their tax burden, which is determined by year-end storage.

"The decline was due to end-of-the-year inventory management," said Edward Morse, Citigroup Inc.’s global head of commodities research in New York. "The market is in for more downward pressure."

Oil is trading near levels last seen during the global financial crisis as Saudi Arabia leads the Organization of Petroleum Exporting Countries to maintain output and defend market share against higher-cost producers, fueling a record supply glut. 

Futures lost 9 percent since OPEC’s Dec. 4 decision to effectively abandon its output target. North America’s biggest pipeline owner Kinder Morgan Inc. said Tuesday it’s cutting its full-year dividend to conserve cash amid the price slump.

No Targets

West Texas Intermediate for January delivery dropped 35 cents, or 0.9 percent, to close at $37.16 a barrel on the New York Mercantile Exchange. It was the lowest close since February 2009. The volume of all futures traded was 64 percent above the 100-day average at 2:45 p.m.

Brent for January settlement fell 15 cents to end the session at $40.11 a barrel on the London-based ICE Futures Europe exchange. It was also the lowest close since February 2009. The European benchmark crude closed at a $2.95 premium to WTI.

OPEC had a collective target of 30 million barrels a day since 2012. Most of the global market “doesn’t have any ceiling” on production, Iraqi Oil Minister Adel Abdul Mahdi told reporters after the meeting in Vienna.

"We’re still feeling reverberations from OPEC’s decision to suspend quotas," said Jason Schenker, president of Prestige Economics LLC in Austin, Texas.

U.S. crude inventories slipped to 485.9 million barrels in the week ended Dec. 4, still about 120 million above the five-year average, according to the EIA. Stockpiles are the highest level for this time of year since 1930.

Diverted Supply

Crude supplies at Cushing, Oklahoma, the delivery point for WTI futures and the nation’s biggest oil-storage hub, rose 423,000 barrels to 59.5 million, the highest since May.

"We will see some draws on the Gulf Coast and gains at Cushing through the end of the year due to tax issues," Matt Sallee, who helps manage $13.5 billion in oil-related assets at Tortoise Capital Advisors in Leawood, Kansas.

Crude production slipped by 38,000 barrels a day to 9.16 million. That’s down from a four-decade high of 9.61 million reached in June, weekly data show. The gain occurred as the number of active oil rigs in the U.S. dropped to 545, the least in five years, according to data compiled by Baker Hughes Inc. Production will drop from an average 9.33 million barrels a day this year to 8.76 million in 2016, the EIA said in its monthly Short-Term Energy Outlook Tuesday.

"The physical markets are slowly healing," Sallee said. "Production has already come down and should fall further. We should be pumping about 500,000 barrels a day less next year, which will certainly help rebalance the market."

Diverging Markets

Diesel dropped to the lowest in more than six years after the report showed supplies of distillate fuel, the category that includes diesel and heating oil, surged 5 million barrels, the most since January. Gasoline rose after inventories of the fuel climbed a smaller-than-projected 786,000 barrels.

"There’s weakness in diesel and a lot of that is due to the warm weather," said Craig Bethune, a fund manager at Manulife Asset Management Ltd. in Toronto who focuses on energy and natural resources investments. "Distillate inventories continue to rise because there’s little heating demand."

Diesel for January delivery fell 1.6 percent to $1.2389 a gallon, the lowest settlement since March 2009. January gasoline climbed 2.3 percent to $1.2317 a gallon. 

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