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Oil dips below $40 a barrel amid signs of growing glut

Oil dipped below $40 a barrel for first time since April on Monday as drilling rigs and inventory levels increased.
Oil dipped below $40 a barrel for first time since April on Monday as drilling rigs and inventory levels increased. AP

Oil dipped below $40 a barrel for first time since April, falling into a bear market on concern that the global supply glut will expand.

Saudi Arabia cut prices to Asian customers as the country continues to fight for market share. Drillers in the U.S. boosted the number of rigs seeking oil for for a fifth week, the longest run of gains since last August, according to data from Baker Hughes. U.S. crude and gasoline supplies are at the highest seasonal level in at least two decades.

“We got here on the back of excessive storage in crude oil and gasoline,” said Bob Yawger, director of the futures division at Mizuho Securities in New York. “The storage levels are so out of whack.”

Oil has tumbled from its recent peak in early June, ending a recovery that saw prices almost double from a 12-year low in February. The persistence of the supply overhang is upsetting industry expectations, with BP, Royal Dutch Shell and Exxon Mobil reporting second-quarter earnings last week that were worse than estimated.

West Texas Intermediate dropped 3.7 percent Monday to close at $40.06 a barrel on the New York Mercantile Exchange, 22 percent below its June peak which meets the common definition of a bear market.

It was also the first settlement below its 200-day moving average since April, adding to the bearish pressure.

State-owned Saudi Arabian Oil said Sunday it will sell cargoes of Arab Light in September at $1.10 a barrel below Asia’s regional benchmark. That is a price cut of $1.30 from August, the biggest drop since November, according to data compiled by Bloomberg.

The U.S. oil rig count climbed last week by 3 to 374, the highest level since March, Baker Hughes said Friday. The nation’s crude inventories rose to 521.1 million barrels through July 22, keeping supplies more than 100 million barrels above the five-year average, Energy Information Administration data show.

Demand for crude is set to decline in the next few months. U.S. refineries typically reduce operating rates to perform seasonal maintenance as the summer driving season comes to an end, after the Labor Day holiday in early September.

“I think the market is going down in anticipation that summer is about to come to an end,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “There is a very strong historical trend for gasoline consumption to start to trail off once you get to Labor Day.”

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