Crude declined to a 12-year low, confirming the view of hedge funds that cut bullish price bets to the lowest since 2010.
Futures dropped as much as 6.4 per cent in New York, adding to last week’s 10 per cent slide. Speculators’ net-long position in West Texas Intermediate crude slipped 24 per cent in the week ended Jan. 5, U.S. Commodity Futures Trading Commission data show. Producer prices in China fell for a record 46th month, bolstering concern about the world’s second-biggest economy. A rapid U.S. dollar gain may send Brent oil to as low as US$20 a barrel, Morgan Stanley said.
“We want to see a sign that China has hit bottom and haven’t gotten it yet,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “I’m not convinced that Brent is likely to go to US$20 because of the stronger dollar, but it’s certainly a realistic possibility.”
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Oil slumped last week as volatility in Chinese markets fuelled a rout in global equities and U.S. stockpiles remained more than 120 million barrels above the five-year average. Saudi Arabian Oil Co., the world’s biggest crude exporter, confirmed on Jan. 8 it was studying options for a share sale, including listing “a bundle” of refining subsidiaries.
WTI for February delivery fell US$2.07, or 6.2 per cent, to US$31.09 a barrel at 1:15 p.m. on the New York Mercantile Exchange. The contract touched US$31.03, the lowest intraday price since December 2003. Total volume traded was 34 per cent above the 100-day average. Prices dropped 30 per cent last year.
Brent for February settlement decreased US$2.19, or 6.5 per cent, to US$31.36 on the London-based ICE Futures Europe exchange. It touched US$31.36, the least since April 2004. The European benchmark crude traded at a 27 cent US premium to WTI.
Speculators’ net-long positions in WTI declined by 23,863 contracts to 76,934 futures and options, the lowest since July 2010, CFTC data show. Longs, or bets that prices will rise, dropped 2.5 per cent to the lowest since July, while shorts climbed 11 per cent.
“The hedge funds are saying that this isn’t a good time to try and find a bottom in the oil market,” said Bob Yawger, director of the futures division at Mizuho Securities USA in New York
Crude also fell as the U.S. dollar climbed, diminishing the appeal of commodities denominated in the currency. The Bloomberg Commodity Index, a gauge of 22 raw materials slumped to the lowest level since 1999.
Oil is particularly leveraged to the dollar and may fall between 10 to 25 per cent if the currency gains 5 percent, Morgan Stanley analysts including Adam Longson said in a research note dated Monday. Societe Generale SA cut its average 2016 Brent forecast to US$42.50 a barrel from US$53.75 in a report Monday, while Bank of America Corp. trimmed its a forecast to US$46 a barrel from $50.
“There are no technicals holding up the price so we’re looking at a falling knife,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “Concern about global economic sentiment and dollar strength are continuing to weigh on the market.”
Saudi Arabian Oil, known as Aramco, is studying whether to list “an appropriate percentage” of shares of the parent or a bundle of “downstream” units, according to an e-mailed statement Jan.
8. The findings of the review will be presented to the board of directors, which will make recommendations to the state-owned company’s Supreme Council, Aramco said.
A U.S. Energy information Administration is projected to report on Jan. 13 that inventories of crude oil, gasoline and distillate fuel increased last week, according to a Bloomberg survey of analysts.
“Another bearish storage report will send us to new lows and this week’s has the potential to be a doozy,” Yawger said.
Fuel futures followed crude to new lows. Gasoline for February delivery dropped 2 per cent to US$1.1051 a gallon, after touching US$1.1009, the lowest since February 2009. Diesel for February delivery decreased 3.9 per cent to US$1.0113 and touched US$1.0092 the least since June 2004.