Crude oil Pipelines. (Photographer: Luke Sharrett/Bloomberg)

Crude Tumbles as Record U.S. Output Stokes Oversupply Anxieties

(Bloomberg) -- Oil posted the biggest loss in two months as record crude production from U.S. fields reignited worries that supplies will swamp demand.

Futures slid 2.5 percent in New York. Crude output from American wells jumped to 10.25 million barrels a day last week, vaulting the U.S. into the elite of world producers alongside Saudi Arabia and Russia. With production set to climb even higher later this year, the Saudi- and Russia-led alliance of other major suppliers will come under renewed pressure to reconsider self-imposed output caps aimed at eroding a glut.

“Production was up fairly strong,” Nick Holmes, an analyst at Tortoise Capital Advisors LLC in Leawood, Kansas, which manages $16 billion in energy-related assets, said by telephone. “There’s still some trepidation on the supply side and will U.S. shale growth overwhelm the strong demand that we expect this year?”

The U.S. Energy Information Administration’s weekly tally of domestic output shows the country is probably already on par with Saudi Arabia, OPEC’s biggest producer and de facto leader, and closing fast on Russia. Saudi output probably averaged 10 million a day last month and Russia pumped an estimated 10.98 million a day in 2017. To be sure, the numbers aren’t directly comparable because they involve differing time periods.

U.S. production has jumped 78 percent in the past six years as drilling techniques perfected to release natural gas from shale were adopted by oil explorers. With oil still trading above $60 a barrel, shale drillers may be inclined to boost production because they can buy hedges that lock in profits and shield them from any subsequent price declines.

Bombshell Production

The bombshell production report on Wednesday came a day after the government made a surprise revision to its supply outlook that forecast domestic daily output will hit 11 million barrels in November, a year sooner than previously expected.

West Texas Intermediate for March delivery dipped $1.60 to settle at $61.79 a barrel on the New York Mercantile Exchange, the lowest level in four weeks. Total volume traded was about 68 percent above the 100-day average.

Brent for April settlement declined $1.35 to end the session at $65.51 a barrel on the London-based ICE Futures Europe exchange, the lowest level since late December. The global benchmark traded at a premium of $3.96 to WTI for the same month and closed below its 50-day moving average for the first time since July.

Oil market volatility, as measured by the CBOE/Nymex Oil Volatility Index, jumped to the highest level since November after touching September highs during the day.

Further weighing on crude prices was a strengthening U.S. currency, which reduced the appeal of dollar-denominated raw materials as investments. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose as much as 0.6 percent.

“The real story is investors remain cautious with continued U.S. supply growth,” Matthew Beck, managing director of an $8 billion oil and natural gas portfolio at John Hancock Financial Services Inc. in Boston, said by telephone. At the same time, “you’ve seen a general strengthening in the U.S. dollar. That’s a bit of a drag on oil prices as well.”’

The EIA also said on Wednesday that American crude in storage tanks and terminals increased by 1.9 million barrels last week as refiners shut or limited operations to conduct seasonal maintenance. Gasoline and diesel stockpiles expanded as well.

Other oil-market news:

  • Gasoline futures dropped 2.2 percent to settle at $1.766 a gallon, the lowest level since early January.
  • Ineos Group said it plans to restart the Forties Pipeline System overnight, the company said in a statement. The North Sea pipeline network was halted because of a valve-related issue.
  • Goldman Sachs Group Inc. is standing by its very bullish call on commodities, saying that the recent global markets selloff only bolsters its view that raw materials are set to perform well in the months ahead.

©2018 Bloomberg L.P.

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