US Crude falls $1/bbl as large inventory stokes oversupply fears

By James Dennis

SINGAPORE (ICIS)–US crude continued to trade near two year low as prices fell by more than $1.00/bbl on Thursday morning as larger than expected build in the US crude stocks added to the growing concerns about the oversupply situation and weaker global oil demand.

At 05:56 GMT, November NYMEX light sweet crude futures (WTI) were trading at $80.72/bbl, down by $1.06/bbl from the previous close.

Earlier, the US benchmark fell to a low of $80.56/bbl, down $1.22/bbl on the previous session. WTI prices continued to trade close to their lowest levels since June 2012.

November Brent crude on London’s ICE futures exchange was trading at $82.98/bbl, down by $0.80/bbl from the previous close.

Earlier, the North Sea benchmark fell to a session low of $82.91/bbl, down by $0.87/bbl and the lowest intraday trading level since 23 November 2010.

The November ICE Brent futures contract expires at the close of business on Thursday.

ICE Brent crude futures have fallen more than 25% since hitting a year high of  $115.71/bbl in June 2014.

Crude prices retreated after weekly data from the industry body the American Petroleum Institute (API) revealed a much larger than expected 10.2m bbl build in US crude stocks for the week ended 10 October.

The rise in crude failed to be countered by a larger than forecast drawdown in US gasoline stocks of 3.1m bbl/day.

Traders now await the release of the more closely followed official US government inventory data, which is due to be released later today by the Energy Information Administration (EIA).

The fall in prices on Thursday reversed a recovery the US crude made in the previous session, which had enabled the US benchmark to claw back most of its earlier losses and close on Wednesday just $0.06/bbl lower at $81.78/bbl despite the release of downbeat US retail sales data.

Crude markets have been undermined by increased supplies, principally from the US where output has hit its highest level in nearly 30 years boosted by the exploitation of shale oil or light tight oil reserves.

In its recent monthly report the International Energy Agency (IEA) reported a huge 2.8m bbl/day year on year increase in global oil supplies in September to 93.8m bbl/day.

Meanwhile, global oil demand growth has failed to keep pace with rising supply.

The mismatch has been attributed to weak economic growth levels in Europe and Japan as well as in developing nations such as Brazil. 

Although growth rates remain high for China demand has eased amid a cooling of the economy.

In its recent report the IEA reduced its global oil demand growth forecast for 2014  and 2015 to 700,000 bbl/day and 1.1m bbl/day respectively. 

Global demand in 2014 is now forecast at 92.4m bbl/day by the IEA.

Despite the fall in crude prices OPEC, which supplies 40% of the world’s crude has yet to indicate that it will move to reign in production, as it has previously done in such circumstances.

Instead, faced with reduced exports to the US and Europe, members appear to be focussed on competing for market share particularly in Asia.

Saudi Arabia, Iran, Iraq and Qatar recently cut their official prices to Asian customers to their lowest level since 2008.

There are expectations that continued low crude prices could drive down output from high cost unconventional production such as deepwater projects, oil sand and US shale oil.

However, the IEA estimated in its latest report that only around 8% of such production totalling around 1.05m bbl/day requires Brent prices above $80/bbl to breakeven.

Meanwhile, Middle East producers, many of whom require oil prices above $90/bbl to meet their budget requirements, face increased competition in Asia from cargoes from West African, South America and elsewhere.

This has followed a marked narrowing in price differences between benchmark Dubai crude against which Middle East exports to Asia are priced and Brent which is the benchmark for over half of the world’s traded oil.