West Texas Intermediate futures tumbled 2.5 percent as the deteriorating outlook for Chinese growth follows the highest production from OPEC in three years in July. Iran’s nuclear deal with world powers last month fueled speculation that it will pump more crude, adding to the glut.

Oil moved into a bear market in July, and the biggest producers are preparing for an extended downturn. U.S. crude supplies were almost 100 million barrels above the five-year seasonal average as production has been slow to decline even as prices fell by more than half.

"I have a really hard time painting a bullish scenerio for oil,” Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, said by phone. "Once prices break through the six-year lows traders will be gunning for $39.”

West Texas Intermediate for September delivery fell $1.07 cents, or 2.5 percent, to settle at $42.23 a barrel on the New York Mercantile Exchange. It touched $41.91, the lowest since March 2009. The volume of all futures traded was 61 percent above the 100-day average at 3:25 p.m. Prices are down 21 percent this year.

Brent for September settlement, which expires Friday, dropped 44 cents, or 0.9 percent, to end the session at $49.22 a barrel on the London-based ICE Futures Europe exchange. October futures slipped 55 cents to $49.63. The European benchmark crude closed at a $6.99 premium to WTI, the most since May 15.

Commodities Swoon

The yuan’s devaluation this week has driven down oil and industrial metals amid speculation the weaker Chinese currency will hurt demand by making dollar-denominated imports more expensive. The Bloomberg Commodity Index of 22 raw materials fell 0.4 percent.

Goldman Sachs Group Inc. estimates the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall, forcing the market to adjust, analysts including Jeffrey Currie said in a report dated Aug. 6.

"The oil market will remain under a lot of pressure for the next two or three months,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion, said by phone. "I don’t see any end of this until seasonal demand picks up.”

About 170 million barrels of crude and fuel have been added to storage tanks and 50 million to floating storage globally since January, according to the Goldman report.

Lasting Glut

The global oil glut will last through 2016, the International Energy Agency said in a report Wednesday. Record inventories will expand further even as consumption growth doubles in 2015 and supplies outside OPEC contract next year for the first time since 2008, the IEA predicted. 

Stockpiles won’t be diminished until the fourth quarter of next year, or even later if sanctions on Iranian crude are lifted, the agency said.

The unexpected shutdown of refinery units in New Jersey and Indiana raised the prospect of lower fuel supplies in New York and Chicago and less demand for crude in the weeks ahead. Refinery inputs to distillation units have stood at a record 17.3 million barrels a day in the two weeks ended Aug. 7, according to the Energy Information Administration. Refiners cut operating rates during September in nine of the past 10 years.

Seasonal Decline

"The recent refinery disruptions take something away from crude oil consumption and also underline the upcoming seasonal decline,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. "The record crude runs of more than 17 million barrels a day will drop to between 15.6 and 15.8 million barrels a day by late October with scheduled maintenance. The widening WTI-Brent spread makes sense.”

September gasoline futures decreased 4.94 cents, or 2.8 percent, to close at $1.7141 a gallon. Diesel for September delivery dropped 1.82 cents, or 1.2 percent, to $1.5687.

 

(Bloomberg)