U.S. prices sank to a more than three week low in early Asian trade Wednesday as the prospect of bigger U.S. crude stocks indicate the global oil glut could be more stubborn than previously thought.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in JulyCLN6, -0.56% was last down $0.73, or 1.5%, at $47.76 a barrel, after dropping to $47.55, the lowest intraday level since May 23.
August Brent crude LCOQ6, -0.70% on London’s ICE Futures exchange fell $0.76, or 1.4%, to $49.07 a barrel, the lowest level since early June. Earlier in the session, the grade fell to $48.91, the lowest intraday day level since June 2.
Prices have climbed in recent months as wildfires in Canada and political upheavals in Africa wiped out some productions. U.S. output has also declined dogged by waning investment.
But many market observers had predicted the price rally was vulnerable given the market is still amply supplied.
Prices started to tumble last Friday when industry group Baker Hughes Inc. reported the second consecutive rise in the number of active oil rigs in the U.S., a sign that rising prices was luring shale producers back to the oil field.
Adding to the worries was the latest forecast from the American Petroleum Institute which suggested a 1.2-million barrel increase in U.S. crude stocks for the week ended June 10. A survey of analysts by The Wall Street Journal had estimated a 2.1-million barrel drop.
Official data from the Energy Information Agency will be released later today. If the EIA data confirms the expansion, it would be “a counter-seasonal build in stocks that at least interrupts the prior downtrend,” said Tim Evans, a Citi Futures analyst.
With a British referendum on its fate in the European Union around the corner and several central banks meeting this week, investors are mainly in a wait-and-see mode, said Avtar Sandhu, a commodities analyst at Philip Futures.
The growing possibility that the U.K. might leave the EU has rattled global markets this week, weighing on riskier assets such as commodities, and boosting safe-haven investments like the dollar. The WSJ Dollar Index BUXX, -0.16% recently traded up 0.5% at 86.86. A stronger dollar can make dollar-pegged oil more expensive for foreign buyers.
“The overall market sentiment is soft because even though production has slowed, supply is still in excess of demand and a rebalance has not yet started,” said Sandhu.
His view is echoed by the International Energy Agency. On Tuesday, the group said global oil market is moving close to balance, but not until the second half of the year.
The energy watchdog warned of an “enormous inventory overhang” which is sure to dampen prospects of a significant increase in oil prices.
The IEA sees oil demand growing by 1.3 million barrels a day in 2017. Supplies from the Organization of the Petroleum Exporting Countries is expected to see a modest rise of 200,000 barrels a day.
OPEC production is seen growing modestly in 2017 and global oil stocks will build slightly in the first half of next year before falling in the second half. For the whole year, it estimates a small stock draw of 100,000 barrels.
Nymex reformulated gasoline blendstock for July RBN6, -1.78% — the benchmark gasoline contract — fell 368 points to $1.4845 a gallon, while July diesel traded at $1.4797, 223 points lower.
ICE gasoil for July changed hands at $438.75 a metric ton, down $4.75 from Tuesday’s settlement.