Crude tumbles below $34 as U.S. supply glut expands

NEW YORK (Bloomberg) -- Oil fell below $34/bbl in New York after U.S. gasoline inventories surged the most in 22 years and crude supplies at the American hub climbed to a record.

 

Brent oil dropped to an 11-year low in London. Gasoline stockpiles increased 10.6 MMbbl last week, the most since May 1993, government data show. Crude inventories in Cushing, Oklahoma, the delivery point for West Texas Intermediate oil, rose to an all-time high, while nationwide supplies fell. Prices also dropped after China’s central bank devalued the yuan, a reminder of the August cut that sparked a wave of financial-market turmoil. 

 

Oil prices have shrugged off rising tension between Iran and Saudi Arabia as supplies continue to outstrip demand. The market also ignored a “cry for help” from Libya’s National Oil Corp. as Islamic State militants attacked crude storage tanks in the region of Es Sider, the country’s biggest oil port. Analysts from Citigroup Inc. to UBS Group AG predict crude may fall to $30 in the coming months.

 

"The spectacular build in gasoline supplies is just going to crush the market," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "The gasoline build colors everything. Even with the inventory decline we have a surfeit of crude."

 

Brent for February settlement fell $1.80, or 4.9%, to $34.62/bbl on the London-based ICE Futures Europe exchange at 12:30 p.m. in New York. Futures slipped to $34.26, the lowest since July 2004. Total volume traded was 61% higher than the 100-day average.

 

West Texas Intermediate for February delivery declined to $1.64, or 4.6%, to $34.33/bbl on the New York Mercantile Exchange. It touched $34.17, the lowest since Dec. 21, when the contract hit a 6-year low. Prices fell 30% last year.

 

Gasoline stockpiles climbed to 232 MMbbl in the week ended Jan. 1, the highest since March, according to the Energy Information Administration. Supplies of distillate fuel, the category that includes diesel and heating oil, climbed 6.3 MMbbl to 159.4 MMbbl, the most since February 2011.

 

"Any support from the crude supply drop was far offset by the staggering builds in gasoline and distillate," said Matt Sallee, who helps manage $13.5 billion in oil-related assets at Tortoise Capital Advisors in Leawood, Kansas. "Prices would normally surge if you had ISIS attacks on oil facilities in Libya, a serious escalation in tensions between Saudi Arabia and Iran, and limited spare capacity. There’s more attention being paid to China devaluing the yuan."

 

Stockpiles at Cushing, which is also the biggest U.S. oil storage hub, rose 917,000 bbl last week. The site has a working capacity of 73 MMbbl, according to the EIA. Nationwide, inventories fell 5.09 MMbbl to 482.3 MMbbl last week, the Energy Information Administration said.

 

Resilient Production

 

Crude output rose by 17,000 bpd to 9.22 MMbpd, the highest since August. That’s down from a four-decade high of 9.61 MMbpd reached in June, weekly data show. The gain occurred as U.S. producers cut the number of rigs drilling for oil to 536, near the fewest in five years, according to data compiled by Baker Hughes Inc.

 

"I’m shocked that production has held up as well as it has given that the rig count has dropped to a little over 500," Sallee said. "I still believe we’ll see production fall by about 500,000 barrels this year. It might be backloaded though."

 

Oil’s collapse may increase borrowing costs for producers as revenue falls. Oil-rich Alaska had its credit rating cut by Standard & Poor’s as low prices left the state with a growing gap in its budget. Moody’s Investors Service said Tuesday that metals and energy producer Freeport-McMoRan Inc.’s debt is under review for possible downgrade.