Oil Falls to Lowest in Almost Seven Years Amid U.S. Supply Glut

  • Crude stockpiles swelled by 4.8 million barrels last week: EIA
  • White House announces support for deal to lift oil-export ban

Three Factors Impacting the Outlook for Oil

Oil closed at the lowest level in almost seven years after U.S. crude inventories surged and the Federal Reserve raised interest rates for the first time in almost a decade.

Futures fell 1.6 percent in New York adding to Wednesday’s 4.9 percent decline. U.S. stockpiles climbed to 490.7 million barrels last week, the highest level for this time of year since 1930, the Energy Information Administration reported Wednesday. Goldman Sachs Group Inc. warned of “high risks” that oil may fall even lower as supplies swell. The Fed’s decision bolstered the dollar, diminishing the appeal of commodities denominated in the U.S. currency.

Oil is trading near levels last seen during the global financial crisis on signs a record surplus will worsen. The Organization of Petroleum Exporting Countries earlier this month effectively abandoned production limits to defend market share, while the White House on Wednesday announced its support for a deal reached by congressional leaders that would end the nation’s 40-year ban on crude exports.

"The Fed move is bearish for oil," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion in assets. "The next several months, we’ll probably see a sustained downward trend punctuated by short bursts of short covering. This will continue until we see supply decline."

New Lows

West Texas Intermediate for January delivery slipped 57 cents to close at $34.95 a barrel on the New York Mercantile Exchange. It was the lowest settlement since Feb. 18, 2009. Prices have dropped 34 percent this year and are heading for a second annual decline.

Brent for February delivery sank 33 cents, or 0.9 percent, to $37.06 a barrel on the London-based ICE Futures Europe exchange. It’s the lowest close since December 2008.

The premium of Brent, the global benchmark, to WTI widened to 79 cents after shrinking earlier amid speculation the plan to allow domestic crude to be shipped overseas may help alleviate the U.S. supply glut. The nation’s crude inventories have swelled to 130 million barrels above the five-year seasonal average, EIA data showed. Crude imports climbed 3.6 percent to 8.31 million barrels last week, the highest since September 2013.

Little Ambitious

"Clearly the news of the last couple days has been more bearish for WTI," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "There’s a recognition in the WTI market that we were a little ambitious in trying to close the gap with Brent. The highest imports in more than two years were a result of it coming in so much."

Prices are probably low enough to choke off investment in supplies and tame the current surplus by the end of 2016, Goldman Sachs said in the report Thursday. Still, crude-storage tanks may reach their limit, pushing oil down to levels necessary to force an immediate halt to some production, the bank said.

“We still see high risks that prices may decline further, as storage continues to fill,” Damien Courvalin, a Goldman Sachs analyst in New York, said in the report.

Oil prices also fell as the dollar’s advance undercut the investment appeal of commodities. The Bloomberg Dollar Spot Index, a gauge of the U.S. currency against 10 major peers, gained 0.8 percent to the highest level in more than 10 years.

Diesel Rout

Diesel futures tumbled to the lowest level; in more than a decade as warm weather in the eastern U.S. has curbed demand for distillate fuels, a category that includes diesel and heating oil.

January diesel futures fell 0.6 percent to close at $1.1053 a gallon, the lowest close July 2004. Gasoline for January delivery rose 2.3 percent to settle at $1.2616 a gallon. 

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