Oil Sinks Back Below $50 as Market Awaits Signs of Supply Drop

(Bloomberg) -- Oil ended a short-lived spike above $50 a barrel in New York as investors wait for more evidence that global markets are rebalancing.

Futures closed 2 percent lower, the biggest drop in more than a week. After rising production in Libya led an increase in OPEC output in July, all eyes are turning to U.S. supplies. Crude and fuel stockpiles probably declined last week, according to a survey before a report from the Energy Information Administration Wednesday. The industry-funded American Petroleum Institute will release its inventory data later on Tuesday.

The $50-level is “a psychological level. People are really beginning to realize that the market probably needs a steady beat of bullish information to continue to rally,” Gene McGillian, market research manager at Tradition Energy in Stamford, Connecticut, said by telephone. “If we don’t get a really positive inventory report this week, the market is vulnerable to a nice little turnaround” after rallying the last couple of weeks, he said.

Oil closed above $50 for the first time since May on Monday. While the Organization of Petroleum Exporting Countries and its allies work to rebalance the market and trim global inventories, doubts remain that supplies will increase from elsewhere, with the U.S. oil rig count at the highest level since April 2015.

West Texas Intermediate for September delivery declined $1.01 to settle at $49.16 a barrel on the New York Mercantile Exchange. Prices traded as low as $48.37 during the session. Total volume traded was about 35 percent above the 100-day average. The contract gained 0.9 percent to $50.17 on Monday.

Race to Rebalance

Brent for October settlement dropped 94 cents to end the session at $51.78 a barrel on the London-based ICE Futures Europe exchange, and traded at a $2.49 premium to WTI for the same month. The September contract expired Monday.

“This race to rebalance supply and demand--it’s a marathon and lot of people are entering it thinking it’s just a quick sprint,” Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets, said by telephone. “But, this rebalancing is going to take a lot longer than a month, or six months or even a year.”

OPEC’s crude output rose 210,000 barrels a day in July to 32.87 million, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

Libya -- which along with Nigeria is exempt from OPEC’s cuts as it seeks to restore output lost to internal strife -- added 180,000 barrels a day. Saudi Arabia increased output by 30,000 barrels a day to 10.05 million.

The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, climbed as much as 0.2 percent. A stronger U.S. currency reduces the appeal of dollar-denominated raw materials as an investment.

U.S. Inventories

U.S. crude inventories probably dropped by 3.1 million barrels last week, according to the median estimate in a Bloomberg survey before an EIA report. Distillate stockpiles are seen falling by 900,000 barrels and gasoline supplies are seen dropping by 1 million barrels. Crude stockpiles at Cushing, Oklahoma, the delivery point for WTI and the biggest U.S. oil-storage hub, probably dropped by 700,000 barrels last week, according to a forecast compiled by Bloomberg.

The recent inventory declines might be attributed to demand during the summer driving season, according to McGillian. “As we move through August, with the anticipation that driving demand is going to drop off, will some of these signs of a tightening inventory picture really just kind of disappear?”

Oil-market news:

Royal Dutch Shell Plc’s Pernis refinery in the Netherlands cannot restart until its power station is repaired, according to a company statement. Shell expects to get units back online in the second half of August at the earliest. A U.S. ban on Venezuelan trade would lead to a reshuffling of oil flows with likely limited impact on prices, according to Goldman Sachs Group Inc. Investors pulled $845.7 million in July from the U.S. Oil Fund, the biggest exchange-traded fund tracking oil prices, data compiled by Bloomberg shows. That’s the largest monthly withdrawal since March 2009.

With assistance from Ben Sharples, Rakteem Katakey and Paul Burkhardt. To contact the reporters on this story: Jessica Summers in New York at jsummers24@bloomberg.net; Nico Grant in New York at ngrant20@bloomberg.net. To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net Carlos Caminada, Mike Jeffers.


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