Oil prices drop as trifecta of trouble may cause glut

Oil prices fell near three-month lows on Thursday, surrendering early gains as investors focused on swelling global crude supply, which is increasing more quickly than many had expected.

Prices rose early in the session when Chinese data showed record oil imports. But the slump resumed as the market focused on record U.S. crude production and signals from Iraq, Abu Dhabi and Indonesia that output will grow more quickly than expected in 2019.

“There’s a trifecta of trouble created by U.S. stockpile builds, OPEC overproduction and the watering down of Iran sanctions,” said Bob Yawger, director of futures at Mizuho in New York.

Brent crude futures, the global benchmark, fell 87 cents to $71.20 a barrel by 11:41 a.m. EST (1641 GMT), sliding off the session high of $73.08. U.S. crude futures fell 61 cents to $61.06.

Earlier this week, Brent dropped to its lowest since mid-August.

China`s crude imports rose to 9.61 million barrels per day (bpd) in October, up 32 percent from a year earlier, customs data showed.

China will still be allowed to import some Iranian crude under a waiver to U.S. sanctions that will enable it to purchase 360,000 bpd for 180 days, two sources familiar with the matter told Reuters on Tuesday.

U.S. crude output reached a new record high of 11.6 million bpd in the latest week and the country has now overtaken Russia as the world`s largest oil producer. The move higher in production was a large jump, “not just a tick,” Yawger said.

The U.S. Energy Information Administration said this week it expects output to top 12 million bpd by the middle of 2019, thanks to shale oil.

Even with U.S. sanctions on Iranian oil in place, investors believe there is more than enough supply to meet demand. Waivers granted to the sanctions intensify the market’s perception that sanctions may not limit crude supply as much as initially expected.

This view is reflected in price charts showing the front-month January Brent futures contract trading at a discount to February. This price structure, known as contango, materializes when market players believe there is a supply glut and decide to store oil rather than sell it. This creates an even larger pool of unsold crude.

Some market watchers believe the Organization of the Petroleum Exporting Countries and allies including Russia may take steps to reduce supply.

"OPEC and Russia may use (production) cuts to support $70 per barrel," said Ole Hansen, head of commodity strategy at Saxo Bank.

(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)