With No Supply Response in Sight, WTI Crashes Through $27

In an especially rocky day of trading in the global financial markets where the Dow plummeted 520 points to 15579 at one point, oil was to blame for most of the negative sentiment. The International Monetary Fund (IMF) revised their forecast downward Tuesday for global GDP growth for 2016 from 3.6 percent (in its October 2015 World Economic Outlook Report) to 3.4 percent, with emerging and developing economies accounting for much of the lowered outlook. In what appears to be in some sense a “negative feedback loop,” crude prices have fallen along with global financial markets and vice versa.

Aside from the persistent glut of oil, which many fear will be exacerbated by the onslaught of Iranian crude re-entering world markets in coming weeks and months, oil traders are focused most recently on more macro factors affecting the world economy, such as a strengthening dollar and slow economic growth outside of the U.S. Especially weak economic data coming out of China, and other developing countries such as Brazil and Russia, are weighing on oil prices, as growth from emerging economies should, ostensibly, be an important driver in clearing the global oversupply situation. In its closely-watched monthly Oil Market Report, the International Energy Agency (IEA) estimated that a global oil supply/demand imbalance of 1.5 million barrels per day will persist through the first half of 2016. The IEA anticipates the rate of worldwide oil consumption growth to slow in 2016 to 1.2 million barrels per day and that China will show a slowdown in crude demand growth from almost 6 percent in 2015 to about 3 percent in 2016.

Oil prices fell to fresh multi-year lows Wednesday, with a very fast sell-off occurring. On the ICE, the front-month Brent contract settled down about 3 percent to $27.88/bbl. The front-month WTI contract settled on the NYMEX at $26.55/bbl, down 6.7 percent. As the February WTI contract expired at Wednesday’s settlement, some of the accelerated price slide could be related to the fact that storage costs are rising and a steep discount is required in order to entice buyers to take physical delivery for the February contract.

With seemingly no demand catalysts in a greatly oversupplied market, oil traders are seeking signs of a supply response. Data release from the Energy Information Agency (EIA) Thursday could shed more light on whether U.S. production is finally rolling over, which many market watchers were anticipating to happen toward the end of 2015 (but never did). Traders will also home in on crude storage levels at Cushing, OK, which is the delivery point for the WTI contract. For the week ending Jan. 8, the EIA data showed that overall U.S. crude inventories were at 80-year highs (482.6 million barrels).