US oil price falls into bear market

The US oil price has tumbled 22pc since early June and briefly dipped below $US40 amid worries over a global glut.

US crude oil has fallen into bear market territory.

US oil prices entered a bear market Monday, dipping below $US40 for the first time in three months after a price cut from Saudi Arabia.

Oil has been in a steep descent since the start of July after gasoline and other fuel cargoes began backing up world-wide and a spring rally lured US producers into adding more working rigs. Now the Saudi Arabian Oil Company, known as Saudi Aramco, is making some of its deepest price cuts in years, leading some to question whether the oversupply that has dragged down oil prices for two years will linger for months to come.

Monday reflected oil’s biggest loss since July 13 and the ninth losing session in the past 11, causing ripple effects into other markets. Commodities fell broadly, with the S&P GSCI index, which tracks the prices of 24 commodities, down 2.1 per cent. Energy stocks in the S&P 500 fell 3.4 per cent -- their worst day since late June -- and took the Dow Jones Industrial Average with it, down 36 points, or 0.2 per cent, to 18397.

Light, sweet crude for September delivery settled down $US1.54, or 3.7 per cent, on the New York Mercantile Exchange. It is off nearly 22 per cent from its recent high of $US51.23 on June 8, ending of a rally that had nearly doubled oil prices in just three months.

Brent, the global benchmark, fell $US1.39, or 3.2 per cent, to $US42.14 a barrel, off 19.7 per cent from its high of the year, just shy of a bear market.

The biggest factors in the fall are still the heavy inventories world-wide, especially of gasoline and other fuels, analysts and brokers said. Rising output from the Organization of the Petroleum Exporting Countries have dragged down oil prices, and the number of working rigs in the US also has gone up eight times in nine weeks, with the most recent count coming late Friday.

Saudi Aramco’s decision accelerated the losses Monday. Over the weekend, it cut its export price to Asia by the most in 10 months. The reopen three eastern portsprice-setting process is typically a technical move with little impact on the broader market. But in the past two years, amid a steep drop in global crude prices, the settings have been closely followed by market watchers looking for clues to the intended direction of Saudi oil policy.

New data show Iraqi and Iranian oil production increased in July, too, and on Sunday Libya’s state-owned National Oil Co. said it “unconditionally” welcomed a deal between Libya’s unity government and the Petroleum Facilities Guard to reopen three eastern ports.

Russian supply also has been increasing for three straight months and US supply appears to be coming in above weekly government estimates, analysts at Citigroup Inc. said in a note Monday morning. This all makes it possible that oil could fall further before an increasing chance of a recovery next year, they said.

“This crude overhang is materializing just as a gasoline glut is pressuring refinery margins,” they said.

Many expect refineries to slow their crude buying in the weeks to come because they have produced even more gasoline and other fuels than record demand could absorb. There have been reports about backed- up gasoline and product markets around the world. Refineries also usually slow in the fall for maintenance, and many expect outages to be more prolonged this year because of the glut.

The recent selloff accelerated last week after US gasoline stocks rose 452,000 barrels to hit nearly 242 million barrels in the week ended July 22, a time when gasoline stocks usually fall.

“We continue to be cautious for the rest of this year,” Société Générale SA analyst Michael Wittner said in a note Friday that was released to reporters Monday morning.

While demand has been high, it has also been disappointing and could continue to be, analysts at Barclays PLC said in a note Monday. Government data in the US shows demand there from January to May grew by about 2.5 per cent, but earlier signs from weekly data back in May had suggested it would be almost twice that, they said. Floods in China also are hitting major areas for consumption and could lower demand there by about 100,000 barrels a day.

“Demand growth remains lackluster and has not made significant inroads to clear the inventory overhang for oil,” the Barclays analysts said. “There is no better time to do that during the summer, but summer is already halfway over.”

Gasoline futures settled down 1.58 cents, or 1.2 per cent, at $US1.3036 a gallon, its lowest settlement since March 3. Diesel futures fell 4.96 cent, or 3.8 per cent, to $US1.2579 a gallon, its lowest settlement since April 18.

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