By Timothy Puko
Oil prices on Monday skidded to their biggest single-day
declines in more than three months, as gyrations in Chinese stocks
and the prospect of more crude from the U.S. and Iran revived
worries about the global supply glut.
China's stock markets have plunged in recent weeks, which
sparked worries among investors about oil demand in the world's
second-largest consumer. Iranian officials have also signaled they
want to export even more crude than traders had expected if
diplomats can hammer out a final deal on Iran's nuclear program in
the coming days.
These elements have taken on huge importance as investors try to
sort out whether the global oil market has rebalanced from a
historic collapse. Prices fell nearly 60% after rapidly growing
production from the U.S. shale boom overwhelmed the market. They
rebounded by a third and stabilized throughout the spring as some
investors bet that spending cuts would curtail production, but the
recent collapse comes amid more signs that those expectations
aren't turning into reality.
The fall started late last week as U.S. producers said they
wanted to ramp up production and data showed them adding drilling
rigs to their fields for the first time since December. Iraqi
production also turned out to be larger than expected, and data
showed production across the Organization of the Petroleum
Exporting Countries rising throughout June, analysts said.
"Even without additional Iranian barrels, there is already too
much oil, " said Tim Evans, analyst at Citi Futures Perspective in
New York. "We may have tipped the balance in the market."
The U.S. benchmark oil price slid for the third session in a
row, closing down $4.38, or 7.7%, to $52.53 a barrel on the New
York Mercantile Exchange. Monday's losses are the biggest in
percentage terms for a single session since February, though they
also included declines during limited electronic trading on the
Friday holiday.
Nymex crude settled at its lowest level since April 13. The
losing streak cut prices by 12%, the biggest three-session fall
since late November.
Brent crude, the global benchmark, closed down $3.78, or 6.3%,
to $56.54 a barrel on ICE Futures Europe. Brent had its biggest
one-day dollar decline since Nov. 27 and its biggest one-day
percentage decline since Feb. 4. Its settlement was the lowest
since April. 8.
"It's the day I've been waiting for for three months," said Todd
Garner, managing partner at hedge fund Protec Energy Partners LLC,
which manages $100 million of energy investments from in Boca
Raton, Fla. Mr. Garner is betting futures, largely for September,
will fall back to $49 a barrel.
Mr. Garner and others said the spring rebound was based on a
false premise. Money managers began adding to bets that oil prices
would rise in the winter as U.S. producers started making drastic
cuts to the number of working rigs, taking them to their lowest
point in nearly five years. The bet was that production would
follow or at least hold steady, which hasn't happened. Last week
U.S. figures showed an increase in crude-oil stockpiles for the
first time in nine weeks.
Money managers cut their bets on rising oil prices and added to
bets on falling prices in the week that ended June 30, according to
regulatory data released Monday afternoon. Money managers had a net
216,152 bullish positions on oil futures, the smallest number since
March.
"I still think production is going to increase," said Mark
Waggoner, president of brokerage Excel Futures. "There's a whole
gambit" of bad news for oil Monday.
Oil prices had stabilized at around $60 a barrel for two months,
a period so calm that many investors had left the market to see
what would happen next. Now that prices have broken lower, the
selloff is likely to deepen and could head back to just below $50,
the last point they stabilized at in February, Mr. Waggoner
said.
Capital Economics lowered its year-end price forecast by more
than 8%, it said in a note entitled "All signs point south for oil
prices." It said U.S. oil is likely to end the year at $50 a barrel
and Brent at $55.
The Chinese government over the weekend halted all new initial
public offerings and the central bank is expected to help investors
buy equities, The Wall Street Journal reported. The turmoil in
Chinese stocks is another sign of the wrenching economic
transformation that is under way in the Asian giant. For investors,
the concern is that the Chinese government may struggle to contain
the problems, broadly slowing growth and demand for oil along with
it.
In Vienna, Iran and six world powers are negotiating in an
effort to reach a final agreement on curbing Iran's nuclear
program. The Wall Street Journal reported that Iran wants to double
oil exports to 2.3 million barrels a day if a deal is reached and
sanctions are lifted.
The victory for the "no" vote in Greece's referendum on Sunday
has also prolonged the uncertainty in global crude-oil markets.
Greeks overwhelmingly voted against their international creditors'
conditions for further bailout aid, increasing uncertainty about
Greece's future in the eurozone.
The trouble pushed investors out of the euro and into the
dollar, with the WSJ Dollar Index up 0.2% Monday. Because oil is a
dollar-denominated commodity, a stronger dollar often drags prices
lower.
These factors could drag oil down for a few months, but the
market is likely facing a shortage of supply by next year, said
Dimitry Dayen, senior research analyst at ClearBridge Investments,
which manages $117.8 billion in assets. Mr. Dayen said he is
sticking with his call for $75 oil in 2016.
"There's going to be volatility. There's going to be
oversupply," he said. "However, (it's) important to keep in mind
that sub $50-$55 oil is not going to be sustainable."
In refined products, August gasoline ended down 11.06 cents, or
5.4%, at $1.9237 a gallon on the Nymex, while August diesel lost
13.10 cents, or 7.1%, to $1.7089 a gallon.
Matthew Cowley contributed to this article.
Write to Timothy Puko at tim.puko@wsj.com
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