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Oil crashes after 4-day rally; US inventory renews glut worry

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Oil prices crashed on Wednesday, with US crude losing 9 per cent in one of its biggest daily routs ever, as record high oil inventories in the United States cut short a four-day rally.

[NEW YORK] Oil prices crashed on Wednesday, with US crude losing 9 per cent in one of its biggest daily routs ever, as record high oil inventories in the United States cut short a four-day rally.

The abrupt turn, coming after a 19 per cent price gain between Thursday and Tuesday, also raised questions on whether the market had found a bottom to the selloff that began last summer and is now in its eighth month.

Selling began early in the day after a rebound in the dollar hurt demand for oil from those holding currencies such as the euro. The slide accelerated midmorning, after the US government reported a huge weekly build in crude supplies, and showed its full force in the final hour.

Benchmark Brent oil fell below the key US$55 ($74.20) a barrel mark, after soaring to a one-month high of US$59 just a day ago. US crude broke below US$48, after Tuesday's peak above US$54. "Hereon, I've no illusions that we'll be going further and further down until something fundamentally changes," said Tariq Zahir, portfolio manager at Tyche Capital Advisors, an investment fund in Laurel Hollow in New York. "I'm sticking to my shorts and selling into any strength I see until we get rid of 1.5 million to 2 million barrels of oil a day from this market," he said.

US crude stocks jumped by 6.3 million barrels last week to 413.06 million, their highest since records began in 1982, the government-run Energy Information Administration reported on Wednesday. Traders and investors had expected a build of just about 3.5 million barrels for the week ended Jan 30. "The truth of the matter is that after this newest record high in crude inventories, it's probably going to be outside forces like the dollar, stock market and economic data which will determine if oil prices continue to go up or pull back,"said Phil Flynn, analyst at the Price Futures Group in Chicago.

Oil's US$9 climb since Thursday had raised speculation that the market's seven-month rout might be near an end.

But the EIA data reignited worries about the global oil glut that sparked the selloff, which erased about 60 per cent from crude prices between June and January.

US crude settled at US$48.45, down 9 per cent. It had only fallen more than that in November - 10 per cent - after the double-digit losses during the height of the financial crisis in 2009.

Brent oil settled at US$54.16, down 6.5 per cent.

The price rebound over the past four days was sparked by data highlighting the dramatic drop in US oil drilling rigs in recent months and a cutback in the exploration budgets of energy firms. Those numbers had suggested to some market players that the crude glut might be overcome more quickly than expected.

But research analysts at investment banks said on Wednesday the market will likely remain oversupplied through the first half. "In our experience, oil markets rarely exhibit V-shaped recoveries and we would be surprised if an oversupply situation as severe as the current one was resolved this soon," Macquarie Research said in a report.

REUTERS

For all our coverage on the oil rout: btd.sg/oilrout14