Crude slumps more than 2% as supply woes persist

Published: Dec 30, 2015 4:51 a.m. ET

 

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Natural gas futures slide after big gains Tuesday

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JENNYHSU

 

Crude prices slumped on Wednesday as fear of expanding crude inventories in the U.S. eroded earlier gains.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in February CLG6, -2.61%  slid 85 cents, or 2.2%, to $37.03 a barrel, while February Brent crude LCOG6, -2.14%  on London’s ICE Futures exchange fell 69 cents, or 1.9%, to $37.09 a barrel.

Oil prices first surged around 3% overnight as the prospect of colder weather in North America elevated expectation for stronger demand for heating fuels. However, prices quickly turned south after the American Petroleum Institute said their estimates show U.S. crude stocks likely grew by 2.9 million barrels in the week ended Dec. 25. Many analysts and firms had expected a decline.

The official data will be released by the Energy Information Administration later today.

“The situation of oversupply is not an easy one to solve, especially if there is not a strong catalyst to spur demand quickly,” says a Singapore-based trader who added that trading volume will remain thin ahead of the New Year holiday break and thus the market is susceptible to volatility.

Read: This may be crude oil’s most bullish signal yet

The overproduction-induced surplus has been a persistent irritant in the oil market for over a year. WTI and Brent prices have plunged more than 70% from their highs in mid-2008 and so far this year, both grades have shed 29% and 34% respectively. Low prices have driven major oil companies to trim investments and cut jobs.

Some analysts had expected oil producing countries to rein in production in the wake of crumbling oil revenues but much to their dismay, the Saudi Arabia-led Organization of the Petroleum Exporting Countries earlier this month said it would maintain its “no-cut” strategy to win market share against their non-cartel rivals, such as Russia and the U.S.

Although U.S. crude stocks still stand at levels unseen in eight decades, production has been tapering off in the last few months, offering a glimpse of hope that the oversupply might slowly abate. However, the general forecast for 2016 is that global demand growth will remain far behind supply growth.

“This makes it more apparent that OPEC supply is the issue...with sanctions against Iran likely to be lifted in the first quarter, we anticipate new highs in total OPEC production helping to maintain the physical surplus,” said Tim Evans, a Citi Futures analyst in a note.

On demand side, China’s crude appetite is likely to remain on an uptrend, albeit a slowing one, as the country continues to take advantage of the low prices to fill its strategic reserves and local refiners capitalize on cheap crude.

“What we need to watch out for is the rise of China’s refined products exports because the refiners will need to exhaust their inventories amid lower domestic demand,” said Gao Jian, an analyst at Shandong-based energy consultant firm SCI International.

In November, China’s export of refined products rose 68% year-over year while imports dropped 21%, underlining a glut in refined products in China.

Nymex reformulated gasoline blendstock for January RBF6, -1.99%  — the benchmark gasoline contract — fell 3 cents to $1.26 a gallon, ICE gasoil for January changed hands at $335.50 a metric ton, down $5.75 from Tuesday’s settlement.

Natural-gas futures for February NGG16, -5.23%  fell 10 cents, or 4.4%, to $2.27 per million British thermal units. On Tuesday, natural gas futures jumped to $2.37, the highest level since mid November amid winter storms and forecasts for colder U.S. weather.