WTI Breaches $40 Level; Brent Falls to a 6-Year Low at $42.49/bbl

The WTI front-month contract settled on the NYMEX at $39.94/bbl Wednesday, down about 4 percent; Brent on the ICE, settled at $42.49/bbl, down about 4.4 percent. WTI’s fall below the $40/bbl level was the first time since August of this year, and Brent’s collapse was a low not seen since March 2009.

In Wednesday’s trading, WTI fell more than 3 percent and traded close to the $40/bbl level after the Energy Information Agency (EIA) released its Weekly Petroleum Status report showing an unexpected build in crude inventories of 1.2 million barrels (versus expectations of a 300,000 barrel draw), representing the tenth consecutive week of a stock increase. WTI breached the $40/bbl threshold later in the day, an important psychological level that could possibly open up doors to prices tumbling further in the coming weeks. The report also showed that oil production in the United States rose week-over-week by 37,000 barrels per day (bpd) to 9.2 million bpd – further evidence that the greatly anticipated rollover in U.S. output (from a high of 9.6 million bpd in April 2015) is not playing out despite drastic cuts in rig count and operators' spending budgets. Many market observers view a significant falloff in U.S. oil output as a potential indicator that the global oil supply/demand situation is moving toward equilibrium.

This week, the oil market is focused on the outcome of the upcoming OPEC meeting to be held in Vienna Dec. 4. While most believe that the cartel’s most influential member, Saudi Arabia, will not amend its strategy to pump oil at record levels in order to gain market share, commentary from OPEC members has managed to move a very sensitive oil market over the past few days. Oil markets rose briefly Wednesday morning on reports that an Iranian oil minister had been quoted saying that there was “OPEC agreement” around an output cut. The market soon read-through the headlines after it was apparent Saudi Arabia was not a party to that agreement.

Some traders were expecting to see from the EIA report that there was some decrease in U.S. crude inventories due to destocking activity that typically takes place at the end of the year among refiners and other holders of crude in order to benefit from a lower tax base (if using a LIFO accounting method, or “last-in-first-out”, companies can value inventories at January oil prices). But, with prices significantly lower than in January 2015, plus other factors at play, the incentive to drawdown inventories might not be as strong this year and instead, inventories showed a surprise increase.

The disappointing data points coming from the EIA’s report, which also included that demand for total products supplied was down 1.6 percent for the 4-week period (versus the same period in 2014), and that crude inventories at Cushing, OK (the delivery point for the WTI contract), was at 59 million barrels (double the amount for the same period last year) were the primary drivers for the fall in prices.

Bearish sentiment grew throughout the trading day after Fed Chairwoman Janet Yellen made statements at a conference Wednesday afternoon that demonstrated confidence in the U.S. economy – further hinting that a short-term rate rise is imminent. Depending on the strength of the U.S. Labor Department’s November job report, to be issued Dec. 4, the Fed could announce a rate rise during its next policy meeting, to be held Dec. 15-16. A rate rise strengthens the dollar against other world currencies, which weighs on the oil price, and is priced in dollars. Further strengthening of the dollar versus the Euro looks likely when the European Central Bank follows through (as soon as Dec. 3) on expected measures to further boost its quantitative easing program in order to stave off deflation worries in the Eurozone.


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