Oil prices fell about 3% to a 10-month low in heavy trading on Wednesday, as nagging fears about the global crude glut fed a sell-off that was interrupted only briefly after news of a larger-than-expected drop in US inventories.
US crude futures touched a low of $42.13, the lowest intraday level since August 2016. They were at $42.36 at 1:28 pm eastern time, down 2.6%. Since peaking in late February, crude has dropped by more than 20%. Rallies in that time have not been sustained as concern about inventories has prevailed over brief signals of rebalancing.
Brent crude futures fell $1.34 to $44.68 a barrel.
“The market wants proof that OPEC cuts are shifting petroleum balances, and it’s not getting it. Crude prices are now on the hunt to find the stress point for the US producers and we’re not there yet,” said Anthony Headrick, energy market analyst at CHS Hedging LLC in Inver Grove Heights, Minnesota.
The US Energy Information Administration said crude inventories declined by 2.7 million barrels in the latest week, exceeding expectations for a 2.1 million-barrel drop. This data supported prices only briefly.
Compliance with an agreement by the Organization of the Petroleum Exporting Countries and other producers to cut output by 1.8 million barrels per day from January reached its highest in May.
However, production is rising in Nigeria and Libya, countries exempt from the deal, offsetting cuts by other OPEC members. Nigeria’s crude exports are set to surpass 2 million barrels per day (bpd) in August, highest in 17 months, as the country recovers from militant attacks that crippled production in 2016.
Investors were discouraged by data showing that oil refineries in China, the world’s top crude importer, are cutting operations during the peak demand summer season.
So far this year, oil has slid 20%, its weakest performance since 1997 for the first half of the year, a period when prices have tended to rise. Brent has risen in the first half of the year in all but six years over that period.
Oil prices ran up in late 2016 and in early 2017 in response to OPEC’s efforts, but several weeks of surprising inventory figures shifted sentiment among speculators, who have shed long positions as the crude glut has persisted.
The December 2017 US crude contract is at its biggest discount to December 2018 futures CLZ7-Z8 since July, a signal that traders anticipate an even longer rebalancing period.
Options activity picked up on Wednesday as well, as investors bought protection against further declines.
“Now everyone seems to be negative,” said Commerzbank analyst Eugen Weinberg.
Iranian oil minister Bijan Zanganeh said OPEC members were considering deeper cuts in output, but should wait until the effect of the current level of production was clear.
“We do not expect the drop in WTI prices to slow production growth in the near term with 2017 capex budgets and plans largely already set,” said Kyle Cooper, consultant at ION Energy in Houston.