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Oil prices drop as ‘trifecta of trouble’ may cause glut

Published 08/11/2018, 18:22
Updated 08/11/2018, 19:12
© Reuters. FILE PHOTO: Pump jacks operate at sunset in an oilfield in Midland, Texas

© Reuters. FILE PHOTO: Pump jacks operate at sunset in an oilfield in Midland, Texas

By Jessica Resnick-Ault

NEW YORK (Reuters) - Oil prices fell more than 1 percent on Thursday, surrendering early gains as investors focused on swelling global crude supply, which is increasing more quickly than many had expected.

The market focused on record U.S. crude production and signals from Iraq, Abu Dhabi and Indonesia that output will grow more quickly than expected in 2019. Fears of the potential supply glut dampened a rally early in the session driven by Chinese data that showed record oil imports.

“There’s a trifecta of trouble created by U.S. stockpile builds, OPEC overproduction and the watering down of Iran sanctions,” said Bob Yawger, director of futures at Mizuho in New York.

Brent crude futures (LCOc1), the global benchmark, fell 92 cents, or 1.3 percent, to $71.15 a barrel by 12:59 p.m. EDT (1759 GMT). U.S. crude futures (CLc1) fell 67 cents, or 1.1 percent, to $61.00 a barrel.

Earlier this week, Brent dropped to its lowest since mid-August.

China's crude imports rose to 9.61 million barrels per day (bpd) in October, up 32 percent from a year earlier, customs data showed.

China will still be allowed to import some Iranian crude under a waiver to U.S. sanctions that will enable it to purchase 360,000 bpd for 180 days, two sources familiar with the matter told Reuters on Tuesday.

U.S. crude output reached a new record high of 11.6 million bpd in the latest week and the country has now overtaken Russia as the world's largest oil producer. The move higher in production was a large jump, “not just a tick,” Yawger said.

The U.S. Energy Information Administration said this week it expects output to top 12 million bpd by the middle of 2019, thanks to shale oil. [EIA/M]

Even with U.S. sanctions on Iranian oil in place, investors believe there is more than enough supply to meet demand. Waivers granted to the sanctions intensify the market’s perception that sanctions may not limit crude supply as much as initially expected.

This view is reflected in price charts showing the front-month January Brent futures contract trading at a discount to February. This price structure, known as contango, materializes when market players believe there is a supply glut and decide to store oil rather than sell it. This creates an even larger pool of unsold crude.

Some market watchers believe the Organization of the Petroleum Exporting Countries and allies including Russia may take steps to reduce supply.

© Reuters. FILE PHOTO: Pump jacks operate at sunset in an oilfield in Midland, Texas

"OPEC and Russia may use (production) cuts to support $70 per barrel," said Ole Hansen, head of commodity strategy at Saxo Bank.

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