U.S. oil plunges more than 2% on supply glut woes

Crude futures lost ground in early Asian trading on Monday, with U.S. oil plunging over 2 percent on festering worries over a global supply surplus.

U.S. crude’s West Texas Intermediate (WTI) January contract CLc1 had dropped 78 cents, or 1.86 percent, to $41.12 a barrel by 0340 GMT. It hit $40.96 a barrel earlier in the session, near levels seen on Friday before the U.S. crude December contract expired.

Benchmark front-month Brent futures for January LCOc1 fell 47 cents, or 1.05 percent, to $44.19 a barrel, recovering from a session-low of $44.04.

“The burden of carrying high U.S. crude oil inventories is large,” Kang Yoo-jin, commodities analyst at NH Investment and Securities in Seoul, said in a note on Monday.

“The markets would likely rebound only if they saw a fall in U.S. crude inventories, while declining U.S. crude output and seasonal demand provide some support to oil at low prices.”

Daniel Ang at Phillip Futures noted that a string of U.S. economic data scheduled for release this week could test the U.S. dollar’s recent strength. A stronger greenback makes dollar-denominated oil contracts more expensive for holders of other currencies.

“With the U.S. dollar index hovering near 100, we expect to see slightly more downside than up. This would mean that oil prices should be holding steady this week and should mean that supports of $40 and $43 for WTI and Brent January 2016 should hold,” he said.

Elsewhere, Venezuela’s oil minister said on Sunday that OPEC cannot allow an oil price war and must take action to stabilize the crude market soon. When asked how low oil prices could go in 2016 if OPEC doesn’t change its policy, he said: “Mid-20s.”

BMI Research, part of the Fitch ratings agency, said: “What is underway now is a structural market rebalancing in which low oil prices clear out high cost production – a relatively small part of which is U.S. shale. It is not the result of OPEC policy, but of the basics of supply and demand.”

The U.S. crude December futures CLZ5 that expired on Friday ended 15 cents down at $40.39 after hitting a low of $38.99, the cheapest since Aug. 27.

Markets were keeping an eye on developing geopolitical tensions in the oil-producing Middle East as Jordan’s King Abdullah, a U.S. ally, will hold talks in Moscow on Tuesday with Russian President Vladimir Putin on how to tackle “terror groups” led by Islamic State in Syria, an official source said.

Source: Reuters