Oil Caps Record Two-Year Loss as Supply Glut Seen Prolonged

  • U.S. inventories in 2015 grew by almost 102 million barrels
  • WTI crude marks first back-to-back annual loss since 1998

Will Oil Keep Dominating Headlines in 2016?

Oil capped its biggest two-year loss on record in New York as expanding U.S. crude stockpiles exacerbated a global glut.

Futures dropped 30 percent in 2015, and averaged the lowest level since 2004. U.S. supplies rose 102 million barrels over the year, the biggest jump since at least 1920 in government data. The 62 percent loss since 2013 exceeded the slump driven by the Asian economic crisis from 1997 to 1998. 

Oil is trading near levels last seen during the global financial crisis after the Organization of Petroleum Exporting Countries abandoned output limits at a meeting earlier this month, signaling the oversupply will be prolonged. Additionally, U.S. crude output is poised to grow for a seventh straight year, and Russian producers are proving resilient to the price slump.

"There’s a lot of oil in tanks and we will have to see stockpiles start to decline in a major way before prices recover," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Prices rose 1.2 percent Thursday as traders covered short positions before the New Year holiday. WTI for February delivery increased 44 cents to settle at $37.04 a barrel on the New York Mercantile Exchange. Total volume traded Thursday was 40 percent below the 100-day average at 2:40 p.m.

Narrowing Spread

Brent for February settlement advanced 82 cents, or 2.2 percent, to $37.28 a barrel on the London-based ICE Futures Europe exchange. Prices fell 35 percent in 2015, a third consecutive annual loss. The European benchmark crude closed at a 24-cent premium to New York futures.

The gap between Brent and WTI has shrunk amid speculation the removal of a 40-year ban on U.S. crude exports may ease the nation’s oversupply. But with the spread at parity or negative, shipments into the U.S. will probably remain elevated, which may create storage problems on the Gulf Coast during the first half of 2016, Citigroup Inc. said in a research report on Wednesday.

"There are a large number of shorts after the semi-slaughter yesterday," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "We’re seeing some short covering before a three-day holiday weekend and the year’s end."

Vitol Group has already committed to buying U.S. shale oil following the lifting of the crude export ban. The Swiss commodity trading company will purchase two cargoes of crude, the first of which will be ready to sail as soon as Thursday, according to ConocoPhillips, which will supply the crude.

U.S. crude stockpiles rose by 2.63 million barrels through Dec. 25 and production increased for a third week, the EIA said in a report Wednesday. Inventories at Cushing, Oklahoma, the delivery point for WTI traded in New York, climbed to a record 63 million barrels. The hub has a working capacity of 73 million barrels, according to the EIA.

Full Tanks

The glut may deepen as the worst flooding across the U.S. Midwest in four years shut some oil pipelines and terminals near St. Louis. The biggest to close is Enbridge Inc.’s Ozark pipeline, which was booked to carry about 200,000 barrels a day this month to Wood River, Illinois, from Cushing.

Russia’s oil output is poised to reach a post-Soviet record of 10.86 million barrels a day this week, according to Energy Ministry data. Russian companies have been helped by a weaker ruble that reduced the cost of services such as drilling, and a tax system in which the state bears most of the risk and reward from price movements.

OPEC crude output rose by 18,000 barrels to 32.139 million a day this month, according to a Bloomberg survey of oil companies, producers and analysts. The group has pumped more than 30 million barrels a day for 19 months. Iran, which plans to boost exports next year once international sanctions are lifted, sees the potential for further price declines, said Rokneddin Javadi, the head of National Iranian Oil Co., according to the Shana news agency.

"The increase in OPEC production has been the number one factor moving the market during 2015 and will dominate at least the first half of next year," said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

Diesel and gasoline followed crude lower in 2015. Diesel futures dropped 40 percent this year, which comes after a decline of the same size in 2014. Gasoline futures fell 12 percent this year, capping a third annual decline.

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