Oil extends losses amid more signs of a global stockpile

Crude prices extended losses Thursday after the International Energy Agency cut its forecast for an increase in global oil demand next year and warned that a "massive overhang" of stock is keeping pressure on the commodity.

That added to losses overnight, triggered by news of continuous growth in U.S. crude stocks and record-high output by Saudi Arabia - both signs that the world is still very much oversupplied with oil.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in September CLU6, +2.78% traded at $41.35 a barrel, down 36 cents, or 0.8%. October Brent crude LCOV6, +2.93% on London's ICE Futures exchange fell 28 cents, or 0.6%, to $43.77 a barrel.

The IEA said it expects global oil demand to grow by 1.2 million barrels a day in 2017, a decrease of 100,000 barrels a day compared with last month's forecast.

"Some momentum will be lost in 2017 due to downgrades in economic growth projections, but the forecast expansion of 1.2 million b/d is still above-trend," the Paris-based energy watchdog said in the report.

IEA said a "massive overhang of stocks is also keeping a lid on prices, with both newly produced and stored crude competing for market share in an increasingly volatile refinery margin environment."

Richard Perry, market analyst at Hantec Markets, said in an email that the IEA report has piled on more pressure on oil and some big support levels for the commodity are nearing. "On WTI, $41.05 is being tested, below that $40.45 with the early August low of $39.20 very important," he said in emailed comments.

The theme of an oversupplied market has been coming from more than one place. Oil prices fell Wednesday after the Energy Information Administration data showed a 1.06 million-barrel increase in U.S. crude inventories in the week ended August 5, pushing total stocks to 523.6 million barrels and 37.7% above the five-year average for the same time last year, said analysts at S&P Global Platts.

The build reflects the growing glut of refined products in the U.S. market, which has led to lower margin and reduced demand for crude. Refinery-use rate fell 1.1% in the same week.

"The already slowing refinery runs and resultant builds in crude inventories is a precursor to what is expected in the fall when refiners enter maintenance," said Anthony Starkey, energy analysis mangers at Platts Analytics' Bentek Energy.

Prices were also hit Wednesday by the Organization of the Petroleum Exporting Countries's monthly report that indicated Saudi Arabia produced at a record-high rate last month by churning out 10.67 million barrels a day. Total OPEC daily production rose to 33.1 million barrels in the same month.

Saudi Arabia usually ramps up crude production during the summer to meet peak domestic demand for electricity for cooling purpose. However, OPEC's report showed that the kingdom's local demand in June decreased compared with a year earlier, suggesting the country had sent production higher in part to increase exports.

The upward trend also suggests that major cartel members are making maintaining market shares their priority and holding on to the tactic that lower oil prices will drive away non-OPEC high-cost producers, such as the U.S. frackers.

Increased production amid a persistent price rout suggests the heavyweights inside the group won't be keen on a collective production freeze when they meet at an informal gathering next month on the sidelines of an energy conference in Algeria.

Even if a freeze pact is forged, it would make little difference to global supply and prices because many producers are pumping at top speed, analysts say.

Moreover, without the full backing of Saudi Arabia and its closest allies, the deal would never come to fruition, said Tim Evans, a Citi Futures analyst. Saudi Arabia was a supporter of a production freeze when the proposal was first floated in April. But the kingdom had a last-minute change of heart when Iran refused to curb its output.

"The talk of limiting output may support the market for a time, much as it did in the first quarter of the year. But a deal seems pretty unlikely and enforcement problematic at any case," he added.

Nymex reformulated gasoline blendstock for September RBU6, +2.07% - the benchmark gasoline contract - fell 1% to $1.2881 a gallon.

Source: MarketWatch