Oil is flirting with the $40 level

“While this is a clear sign that low prices will lead to less production, it was not enough to convince people yesterday”, Commerzbank senior oil analyst Carsten Fritsch said. Meanwhile, Nymex September West Texas Intermediate Crude dropped 4.7 per cent, or $2.02, to $40.60 per barrel, the lowest it’s been since 2009.

The Canadian dollar, which is closely tied to the price of oil, sold off on the news, trading down a third of a cent to close at 76.28 cents US.

The U.S. benchmark hit a 6-1/2 year low of $40.21 a barrel on Thursday.

US benchmark West Texas Intermediate for September delivery closed at US$41.14 a barrel in its last day of trade on the New York Stock Exchange, gaining 34 cents from Wednesday’s settlement.

Chinese stock markets sold off sharply earlier in the week amid growing concerns over the health of the Asian nation’s economy and worries that Beijing may allow the yuan to continue to depreciate, fueling fears over a currency war that could destabilize the global economy.

“This added pressure to crude prices, and we see WTI drop below $41, heading towards the key $40 level”.

U.S. crude Inventories rose to 456.2 million in the week ended August.

The shock bounce in inventories at a time once they usually fall added to considerations of a worldwide surplus, notably as indicators emerge that demand is faltering in prime power importer China.

Petroleum services firm Baker Hughes publishes the weekly report on active US oil rigs, which market-watchers see as an indicator of US crude production and demand.

“Oil balances point to further oversupply throughout 2015 begging the question how low can oil go”, it said in a market commentary, adding that hitting the 2008 low of $32.40 a barrel “is a conceivable reality”.

However, Daniel Ang, an investment analyst with Phillip Futures in Singapore, said he expects WTI to be supported at $40 a barrel in Thursday’s session.

“Technically, we are still seeing a very bearish momentum, however for prices to break below $40 is going to be an arduous task”, he said.

Mr McGillian said that with WTI near US$40, the risk/reward ratio in the market is starting to turn against production.