Oil Heads for Biggest Drop in Five Months Amid Glut

(Bloomberg) - Crude headed for the biggest decline in almost five months as the outlook for the world economy darkened while oil stockpiles remain ample.

Futures fell as much as 5.4 percent in New York as the dollar climbed and equities slipped. OPEC output rose in June, lead by Nigeria, a Bloomberg survey showed. Gasoline dropped to the lowest in more than two months after supplies on the U.S. East Coast reached a record, limiting available storage around New York Harbor, the delivery point for the futures contract.

"Concerns about the economy and a rising dollar are having a major impact," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. "There’s a realization that there’s a product glut, especially in New York Harbor. The seasonal leader is pulling everything lower."

Crude has risen about 80 percent from a 12-year low in February amid supply disruptions and falling U.S. output. Yet the price rebound has spurred activity in the American shale patch, where drillers last week brought back the most oil rigs of any week this year.

West Texas Intermediate for August delivery slipped $2.43, or 5 percent, to $46.56 a barrel at 1:46 p.m. on the New York Mercantile Exchange. Contracts for delivery further out fell less than August futures, shrinking contango, the structure where prices for delivery today are lower than those in future months.

There was no settlement on the Nymex Monday because of the U.S. Independence Day holiday. Trades will be booked Tuesday for settlement purposes.

Risk Off

Brent for September settlement fell $2.28, or 4.6 percent to $47.82 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a 65-cent premium to WTI for the same month.

The Bloomberg Dollar Index, which tracks the currency against major peers, rose as much as 0.7 percent. A stronger greenback curbs investor demand for dollar-denominated commodities.

"It’s a risk-off day across the markets," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "OPEC production estimates are making the rounds and they’re showing a rise in Nigerian production, which is negative for the oil market. The contango is coming in, which is the classic sign of oversupply."

Nigerian Production

Nigeria pumped an average of 1.53 million barrels a day in June, up about 90,000 a day from May, according to the Bloomberg survey. Militants have resurfaced this month, with the Niger Delta Avengers group claiming attacks on five crude-pumping facilities overnight Sunday.

Production in Saudi Arabia, the biggest crude exporter, rose by 70,000 barrels a day to 10.33 million last month, the survey showed. The kingdom typically burns more crude in the summer to generate electricity for air conditioners. Libya raised output by 40,000 barrels a day to 320,000.

"The path of least resistance is lower," said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA. "The long-term picture remains bullish but in the short-term, crude is coming back from the disruptions. We have a lot of crude to work off as well."

Record Supplies

Gasoline stockpiles along the U.S. East Coast surged to 72.5 million barrels in the week ended June 24, data from the Energy Information Administration show. Imports to the region jumped to a six-year seasonal high. U.S. gasoline production hit a record the previous week as refineries bolstered operations to meet driving-season demand.

Several tankers carrying gasoline could not be unloaded at the Port of New York and were forced either to anchor offshore or continue on to the U.S. Gulf Coast, Commerzbank said in a note dated Tuesday.


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