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Oil is poised to return to a bear market amid a seven-day slump to the lowest price in six years as record US stockpiles worsen a global supply glut.
The US benchmark fell as much as 3.3 per cent to $42.03 a barrel. A close at this level would be more than 20 per cent below this year's peak, meeting a common definition of a bear market. Crude inventories expanded by 9.62 million barrels last week, the Energy Information Administration (EIA) said.
Oil has renewed its slide, following a slump of almost 50 per cent in 2014, amid speculation that a slowdown in drilling isn't enough to shrink a global oversupply. US production and stockpiles have continued to expand from 30-year highs even as companies have pulled a record number of rigs from the country's oil fields. Prices also dropped as investors awaited the Federal Reserve's monetary policy decision.
In its statement following a two-day meeting, the Fed's policy-setting committee repeated its view that job market conditions had improved and gave its strongest signal to date that it was nearing its first rate hike since 2006. The statement put a June rate increase on the table, though it also allowed the Fed enough flexibility to move later in the year, stressing that any decision would depend on incoming data.
"There is just too much crude in the market," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "Inventories will continue to go up for at least four to six weeks. We are going to test $40 pretty soon."
West Texas Intermediate for April delivery fell 93 cents, or 2.1 percent, to $42.53 a barrel at 12:33 p.m. on the New York Mercantile Exchange after reaching $42.03, the lowest level since March 2009. The volume of all futures traded was about 6.4 percent above the 100-day average for the time of day.
Brent for May settlement gained 48 cents to $53.99 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $9.46 to WTI for the same month, up from $8.32 on Tuesday.
"Until supplies start to decrease there will be no impetus for the market to rebound," Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at John Hancock in Boston, said by phone. "There's a lot of negative near-term news for the market."
US crude inventories gained for a 10th week to 458.5 million barrels in the seven days ended March 13, the most in weekly Energy Information Administration data dating back to August 1982. Production accelerated to 9.42 million barrels a day, the fastest pace since at least January 1983, the Energy Department's statistical arm estimated.
Supplies at Cushing, Oklahoma, the delivery point for WTI futures, rose 2.9 million to a record 54.4 million. The hub has a working capacity of 70.8 million, according to the EIA.
'Very bearish'
"Production in the United States should continue to increase," said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. "Cushing is now in unchartered territory. It's very bearish for crude."
The Fed's monetary policy decision Wednesday may cause some short-term volatility for oil prices, according to Giovanni Staunovo, an analyst at UBS Group AG in Zurich. The US may cut a reference to being "patient" on rate rises in its statement, Morgan Stanley and BNP Paribas SA said, giving it flexibility on the timing of an interest rate increase.
The US Dollar Index, which tracks the value of the dollar against the currencies of six trading partners, is trading near the highest level in 12 years. A stronger dollar reduces oil's investment appeal.
"The dollar is contributing to the drop in oil," said Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut. "The Fed is probably going to hike the interest rate soon. There is nothing to stem this slide in oil prices."
Iran talks
Iran, Opec's fifth-largest producer, said talks with the US over its nuclear programme are unlikely to yield an agreement this week.
Foreign minister Mohammad Javad Zarif said he doubted "we can get there in the next two days," commenting in Lausanne, Switzerland, where talks are set to run until March 20. Negotiators have until March 31 to agree to a framework agreement.
Iran could increase exports by 1 million barrels a day if international sanctions were lifted, Oil Minister Bijan Namdar Zanganeh said.
The CBOE Crude Oil Volatility Index, which measures price fluctuations using options on the US Oil Fund, advanced to about 56, almost three times what it was a year earlier. Higher volatility increases the likelihood of swinging in and out of bull and bear markets, making those markers less meaningful.
WTI's 14-day relative strength index is about 31, the lowest level since January 15, data compiled by Bloomberg show. A reading below 30 typically signals the market is oversold.
"We have a situation where supply is outpacing demand," said Stephen Schork, president of the Schork Group Inc in Villanova, Pennsylvania. "There will be more storage build in the next few weeks. Capacity will be strained."
