Crude oil briefly dips below $40 U.S. on supply glut

Inventories of the motor fuel slid by 3.26 million barrels last week, according to data from the Energy Information Administration. With the Bank of England’s interest rate cuts to a record low and Japan’s stimulus measures, the Pound and Japanese Yen lost their ground against the USA dollar, which is a negative signal for crude oil prices. In the previous session, it rose 3 percent, after settling below $40 on Tuesday, the first time since April.

As Capital Economics notes, one reason for the declines in June and July was a rebound in the number of USA rigs drilling for oil after the previous surge in prices encouraged the most efficient shale-oil firms to start drilling again.

Oil settled down more than a fifth from its June highs in NY, meaning it is now in a bear market by the most common definition of the term.

West Texas Intermediate (WTI) crude rose $1.10, or 2.7 percent, to 41.93 per barrel, gaining more than $1 at the session peak.

“There are still many out there who fear a further oil price rebound at this point, and that’s probably what sparked the late short-covering”, said Phil Flynn, analyst at the Price Futures Group in Chicago. Total volume traded was about 22 percent below the 100-day average. The contract dropped $1.39 to $42.14 a barrel on Monday.

Standard Chartered bank said there was “no fundamental justification for recent oil-price falls” and “the global oil market has rebalanced, and United States crude supply and inventories are expected to fall”. The global benchmark was at a premium of $1.47 to WTI for October.

Few believe oil will revisit the 12-year lows of $26 to $27 a barrel seen in the first quarter, but many are zeroing in on $35 a barrel or lower for USA crude. “There are still relatively high inventories but the market is approaching a balance”.

“We had a very big correction earlier, and it might have been overdone”, said Mike Wittner, head of oil market research at Societe Generale in NY.

“There is much talk about the product glut replacing the oil glut, and this is a worrisome indicator for crude demand”, said Frank Klumpp, oil analyst at Stuttgart-based Landesbank Baden-Wuerttemberg. Brent crude was up $1.05, or 2.5 percent, at $44.15 a barrel by 12:59 p.m. EDT.U.S. “Indeed, non-OPEC supply has fallen by over one million barrels per day and demand has risen by a similar amount since this time a year ago”, he writes.