Oil prices plunged on the double whammy of a surging dollar and a new report that raised worries about a U.S. oil glut that could send crude dramatically lower.
West Texas Intermediate futures for April fell more than 3.8 percent to $45.2 per barrel, and Brent, the international benchmark, lost more than 2 percent to $56 per barrel. For WTI, the closing low of the year was $44.45 per barrel on Jan. 28, though it touched an intraday low of $43.58 per barrel on Jan. 29.
Oil analysts have expected the market to challenge those lows on strong U.S. supply, and a report Friday from the International Energy Agency fed those fears. The IEA said U.S. production increased by 115,000 barrels a day in February and the growing inventories threaten to drive prices lower.
Oil was also hurt by gains in the dollar. The dollar index rose to a 52-week high, crossing above 100.
“This has been a building situation—the massive inventory increases of the past several weeks and the production level showing no sign of relenting despite the decline in the rig count,” said John Kilduff analyst and founder at Again Capital. “What’s setting us up for another selloff is that we’re hitting a slack demand period in between the winter heating fuel season and the summer driving season.”
The industry has been watching oil supplies surge to 80-year highs, and inventories at the Cushing, Oklahoma, delivery hub for WTI futures contracts continue to balloon.
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“There’s speculation the tanks in Cushing could get full or reach capacity,” said Kilduff. “If no further oil could get into that delivery point, it would send a ripple effect into the futures market and beyond. It could create a break.”
He also said it could send cash prices lower across the U.S. and possibly globally.
While some analysts expect to see $40 as a floor, other say it could be much lower if buyers don’t step up and the spiral is rapid.
“If we test that low, going back to the $30s could be in the cards,” said Kilduff.
Geopolitical pressures could stem some of the selling, but as of now, supply has been the bigger catalyst for market prices.
“Oil is going back to test its low. … We’re going to hold the low or not. If we don’t hold the low, the selling will accelerate,” said stock strategist Andrew Burkly of Oppenheimer Asset Management. “We’re either going to hold it or break it next week. … If oil breaks to a new low, you have to take it as a negative for the (stock) market.”
Burkly said investors would then reassess the impact on earnings of oil and energy companies, and those names could see selling pressure. Energy was the worst performing major industry sector, down 1.4 percent Friday, and down 3.8 percent for the week.
Oil hit a high of $107.73 on June 20. In the last 12 months, energy shares have lost 14 percent.
Crude oil supplies rose 4.5 million barrels in the last week to 448.8 million—a ninth week of gains, according to the Energy Information Administration. Oil stored at Cushing rose by 2.3 million barrels to 51.5 million.
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“On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however,” the IEA said. “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.”