Oil Drops Below $50 for First Time Since December on Supply Glut

OPEC and its partners have seen the post-agreement oil rally evaporate as the U.S. inventory glut becomes impossible to ignore.

West Texas Intermediate closed at the lowest since Nov. 29, the day before OPEC approved the first supply cuts in eight years. Crude supplies rose 8.2 million to the highest level in weekly government data since 1982. Harold Hamm, the U.S. shale oil billionaire, warned on Wednesday that the industry could “kill” the market if it embarks on another spending binge. The market swoon stoked the second-highest WTI options trading volume ever.

Oil had fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and other countries started trimming supply for six months starting Jan. 1 to reduce a global glut. While U.S. shale output has rebounded, larger-than-expected cuts elsewhere and signs of growing demand suggest stockpiles will eventually decline, according to Goldman Sachs Group Inc.

"People are nervous about the global supply-demand balance," Adam Sieminski, a scholar at the Center for Strategic and International Studies in Washington and former head of the Energy Information Administration, said by telephone. "Shale is coming back with $50 oil and there’s uncertainty about whether OPEC and its partners are going to roll over the production agreement."

West Texas Intermediate for April delivery dropped $1, or 2 percent, to close at $49.28 a barrel on the New York Mercantile Exchange. Total volume traded was about 85 percent above the 100-day average. The contract has tumbled 7.6 percent in four days.

Huge Spike

Brent for May settlement slipped 92 cents to $52.19 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since Nov. 30.. The global benchmark crude closed at a $2.36 premium to May WTI.

"If we settle below $50 tomorrow there’s a good chance that we’ll come in Monday to see some liquidation," Kyle Cooper, director of research with IAF Advisors in Houston, said in an interview.

WTI options volume jumped to more than 550,000 on Thursday, according to preliminary Bloomberg data. Oil market volatility, as measured by the CBOE Crude Oil Volatility Index, rose to a three-month high at the close of trading.

"We’re seeing a huge spike in demand for options on the move below $50 for WTI," Clayton Rogers, an energy derivative broker at SCS Commodities Corp. in Jersey City said by telephone.

See also: Shale billionaire Hamm says industry binge can ‘kill’ oil market

Saudi Arabia’s oil minister Khalid Al-Falih said this week global inventories are falling slower than expected, opening the door to extend the output-cut deal beyond its initial six months. Producers will meet in Vienna in May to decide on the next steps. But he insisted the kingdom wouldn’t act alone.

Accord Compliance

"I think there will be a rollover of the agreement, but I don’t think the Saudis are going to rollover to Russia, Iran and Iraq," Sieminski said. "We will have to see compliance from them."

OPEC members exceeded their pledged output reduction last month, Kuwaiti Oil Minister Issam Almarzooq told state-run news agency KUNA. Compliance by non-OPEC countries is at about 50 percent, he said.

U.S. crude production increased for a third week to 9.09 million barrels a day, the EIA said Wednesday. The nation’s output is projected to surge to a record 9.73 million barrels a day next year, according to the EIA’s monthly Short-Term Energy Outlook on Tuesday.

"The market was very hopeful about what OPEC was doing and that we were going to see inventories decline as a result," Jacques Rousseau, a managing director of the Washington-based research firm ClearView Energy Partners, said by telephone. "The numbers from the EIA were pretty brutal."

Oil-market news:

• An oil tanker that was scheduled to load crude at Libya’s Es Sider port changed its course to a different terminal in the west of the country as clashes keep the main export terminals out of service. Waha Oil Co. halted production due to the conflict.
• Royal Dutch Shell Plc will sell almost all its production assets in Canada’s oil sands in a $7.25 billion deal that cuts debt and curbs involvement in one of the most environmentally damaging forms of fossil-fuel extraction.
• Repsol SA made a massive oil discovery in Alaska, the latest sign the state may be poised for a drilling revival.