2-7-18 4:44 PM EST | Email Article
By Alison Sider 

Oil investors are reckoning with shale once again.

In four days of trading, oil prices have given up near all of this year's gains. Prices have tumbled around 6% over that period.

Earlier in the week, oil prices were swept up in the volatility which has rocked the global stock market.

But even as stocks started to stabilize, oil's selloff accelerated Wednesday after the U.S. Energy Information Administration reported that U.S. production surged to 10.251 million barrels a day last week -- a jump of 332,000 barrels a day from the previous week and a new weekly record.

"The report just shattered that connection" between oil and equities, said Bob Yawger, director of the futures division at Mizuho Securities USA. "Crude oil is on its own now, plodding its own path to the downside."

On Wednesday, U.S. crude futures fell $1.60, or 2.52%, to $61.79 a barrel on the New York Mercantile Exchange, the lowest level since Jan. 8. Brent, the global benchmark, fell $1.35, or 2.02%, to $65.51 a barrel on ICE Futures Europe -- its lowest since Dec. 22.

Rising output from shale has been "like the 800 pound gorilla in the back of the room that nobody wants to look at while they're long the market. But it's there," said Mark Benigno, co-director of energy trading at INTL FCStone. "There was a crowded trade on the long side of this market for a long time. That egg is finally cracking," Mr. Benigno said.

The big jump in weekly production comes after the EIA raised its forecasts for oil production this year. It now expects output in the U.S. to average almost 10.6 million barrels a day this year and 11.2 million barrels a day next year.

But the prospect of a wave of new output hasn't been enough to deflate oil prices. Global economic growth has boosted demand for oil. At the same time, the glut that weighed on the market for years has shrunk, escalating geopolitical risks could disrupt supplies, and the Organization of the Petroleum Exporting Countries remains committed to holding oil off the market.

As a result, many analyst and investors say the market could absorb whatever shale producers pump this year. Banks have been raising their oil price forecasts for four months, and investors have amassed record net bullish positions in oil, betting that prices would keep rising.

Now the sentiment that propelled oil prices to fresh three year highs less than two weeks ago is rapidly eroding.

"Everybody got caught up in demand. Demand is great, but the market forgot about supply," said Ebele Kemery, head of energy investing at J.P. Morgan Asset Management.

Ms. Kemery expects that Brent prices will climb back toward $75 to $80 a barrel by the end of the year, but could pull back to $55 to $65 first as investors pay more attention to the oil pouring from shale wells.

Unexpected buildups of fuel in storage also weighed on prices Wednesday.

The EIA reported that stockpiles of crude, gasoline and diesel all rose last week. The American Petroleum Institute, an industry group, had reported Tuesday that inventories of crude and gasoline fell last week.

Commercial crude stockpiles increased by 1.9 million barrels -- less than what analysts surveyed by The Wall Street Journal had predicted. But the 3.4-million-barrel increase in gasoline stocks was much larger than the modest 700,000-barrel increase analysts were anticipating. The EIA reported that diesel stockpiles rose by 3.9 million barrels, compared with a drop of 1.1 million barrels that analysts were anticipating.

Gasoline futures fell 3.92 cents, or 2.17%, to $1.766 a gallon. Diesel futures fell 5.38 cents, or 2.71%, to $1.9313 a gallon.

Write to Alison Sider at alison.sider@wsj.com

 

(END) Dow Jones Newswires

February 07, 2018 16:44 ET (21:44 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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