Oil tumbles after U.S. crude stockpiles climb most on record

By Mark Shenk on 11/2/2016

NEW YORK (Bloomberg) -- Oil tumbled as a record increase in U.S. crude stockpiles heightens the pressure on OPEC to reduce production.

Crude inventories rose 14.4 MMbbl last week, the biggest gain in data going back to 1982, according to the Energy Information Administration. A 2 MMbbl increase was forecast by analysts surveyed by Bloomberg. Imports surged 28% to the highest in four years. Prices were down before the report’s release on record OPEC output last month, which is complicating the group’s effort to stabilize prices.

Oil is continuing its retreat triggered by the failure last week of the Organization of Petroleum Exporting Countries to agree on the member quotas required to implement an output deal reached in Algiers in September. While Goldman Sachs Group Inc. sees little chance of an agreement at an official meeting of the group on Nov. 30, Bank of America Merrill Lynch and OPEC’s head remain confident of a deal.

"Market conditions have deteriorated and we’re back at $45," said Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC in New York. "This report increases the pressure on core OPEC members to come to an agreement on cuts by the time they meet on Nov. 30."

West Texas Intermediate for December delivery dropped $1.33, or 2.9%, to settle at $45.34/bbl on the New York Mercantile Exchange. It’s the lowest close since Sept. 27. Total volume traded was about 15% above the 100-day average at 2:44 p.m.

Brent for January settlement slipped $1.28, or 2.7%, to $46.86/bbl on the London-based ICE Futures Europe exchange. It’s the lowest close since Sept. 27. The global benchmark crude ended the session at a 93 cent premium to January WTI.

Volatility advances

Oil market volatility, as measured by the CBOE Crude Oil Volatility Index, has climbed over the past week as futures moved lower. The index rose as high as 45.51 Wednesday, the highest since Sept. 27.

"We’re right back at the price we saw before the OPEC meeting in September," said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $133 billion of assets. "There’s been a lot of bullish speculation in the market and the news hasn’t supported it. We’re now going to test the bottom end of the recent range."

The gain left U.S. crude supplies at 482.6 million in the week ended Oct. 28, according to EIA data. Stockpiles are at the highest seasonal level in more than 20 years.

Surging imports

Crude imports rose 28% to 9 MMbpd last week, the highest since September 2012. Production increased 0.2% to 8.5 MMbpd. Rigs targeting crude in the U.S. slipped by 2 to 441 last week, the first decline since June, according to Baker Hughes Inc.

"We could fall further but I don’t think it goes below $40," said Joe Bozoyan, an equity portfolio manager who focuses on energy at John Hancock in Boston. "If prices go lower we will see a reversal in the rig count, which would hurt U.S. production."

OPEC pumped a record 34.02 MMbpd in October, up 170,000 bbl from September, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

The OPEC gain was lead by Libya, Nigeria and Iran -- granted special status after OPEC members reached their agreement in Algiers -- pumped an additional 400,000 bpd in October, the survey showed. Iraq, also demanding an exemption, added 50,000 bpd.

The S&P Oil & Gas Exploration and Production Select Industry index dropped as much as 3.6% to the lowest level in three months.

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