Oil dives below US$35, lowest in 11 years, as US supply swells

[NEW YORK] Crude oil prices plunged 6 per cent on Wednesday, diving below US$35 per barrel for the first time since 2004 as data showing a shockingly large build-up of US gasoline supplies fed fears that a global surplus was still growing.

The sell-off, the biggest one-day drop for global benchmark Brent futures since the start of September, takes losses this year to more than 8 per cent, a descent stoked by worsening Chinese economic data, the world's No. 2 oil consumer, and a fierce row between Saudi Arabia and Iran that some say may be more bearish than bullish.

The focus on Wednesday was US government data showing a 10.6 million-barrel surge in gasoline supplies, the biggest build since 1993, which some traders said signalled a slow-down in demand that could prolong the global glut. The figures overshadowed a 5.1 million-barrel fall in crude stocks.

"Gasoline was the sole source of strength within the complex, and that looks to have ended," said John Kilduff, a partner at energy hedge fund Again Capital.

Brent futures fell US$2.19 to settle at US$34.23 a barrel. Earlier, it fell to as low as US$34.13, its lowest level since the start of July 2004.

US crude futures fell US$2.00 to settle at US$33.97 a barrel, its lowest close since February 2009.

Traders shrugged off rising geopolitical risks, including an apparent North Korea nuclear test. Many reckoned that the row between Saudi Arabia and Iran posed little threat to oil shipments, but made an agreement on output even less likely.

"I think we'll see a price war soon to keep market share,"said Tariq Zahir, an analyst at Tyche Capital Advisors. "Prices will get lower and I think we'll hit US$32 again."

Following an 18-month rout, the fierce selling this year has caught some by surprise, and prompted others to pick up bearish options at lower prices. The US$30 February WTI put was the second most traded strike price at 12,700 lots after US$30 March puts at 21,500 lots.

The CBOE volatility index, a gauge of options premiums based on moves in the US oil exchange traded fund, was up 5.5 per cent after moving sideways on Tuesday.

"We've entered some unchartered territories, so it's no surprise that traders are pumping volatility," said John Saucer, vice president of research and analysis at Mobius Risk Group.

Feeding into the weak market sentiment, a survey showed that China's services sector expanded at its slowest pace in 17 months in December, following on from weak factory data on Monday.

REUTERS