Oil prices sank on Friday as investors digested a week’s worth of grim economic news and sold off with the price of crude still close to the peak for this year.
Benchmark crude for May delivery dropped US$2.06 to US$52.28 a barrel on the New York Mercantile Exchange, shedding most of its gains for the week.
In London, Brent prices fell US$1.83 to US$51.63 a barrel on the ICE Futures exchange.
Crude stocks surged all week as traders and brokers started to sense the return of a bull market. Prices have steadily increased for a month.
Oil prices set new highs this year on both Tuesday and Thursday, and there is a growing consensus that there will be a supply shortage as oil companies slash spending on exploration and production.
But most analysts agree that will not occur for some time because demand for energy has fallen so fast.
“People are getting way ahead of the game” said Michael Lynch, president of Strategic Energy & Economic Research.
“There’s still a lot of inventory out there,” he said.
The federal government said on Wednesday that crude storage facilities in the US are brimming with more oil than they’ve had in 16 years.
Combined with the country’s strategic petroleum reserve, the nation now has 1.05 billion barrels of oil in storage.
Crude is piling up as airlines, manufacturers, automakers and just about every other sector slow down and millions of workers lose their jobs.
The US Energy Department said on Thursday that US stores of natural gas rose by 3 billion cubic feet to about 1.65 trillion cubic feet for the week ended on March 20.
And analyst and trader Stephen Schork said that electricity demand was also way down, with the amount of electrons transmitted last week at the lowest level since April 14, 2006.
“Bottom line, nothing has changed,” Schork said in his daily oil report. “Underground caverns, mines and aquifers are brimming with molecules for this point in the season. The heating season is winding down and industrial and commercial demand is virtually nonexistent.”
Crude prices followed the meteoric rise in the equities markets last week, but a surging dollar sparked investors to give up commodities stocks, said Andrew Lebow, senior vice president and broker at MF Global.
Oil, which is traded in US currency, usually moves in the opposite direction of the dollar.
“The dollar’s strong as hell today,” Andrew Lebow, senior vice president and broker at MF Global. “It’s gotten people’s attention.”
There are signs that the supply of crude is getting closer to matching demand, which has evaporated.
OPEC has promised to slash production by 4.2 million barrels per day. Companies that track supertankers show that exports from OPEC countries have dropped to the lowest level since June 2003, analyst Addison Armstrong said.
A new study by Cambridge Energy Research Associates also said the plummeting crude price has sent shockwaves through the oil industry, discouraging enough exploration to cut future oil supplies in half.
The CERA report said that of the potential 14.5 million barrels per day in new production expected from this year to 2014, about 7.6 million barrels were “at risk.”
“A lot of those reports tend to be too pessimistic,” Lynch said. “There are a lot of projects that started when prices were at US$40 a barrel. And there’s no reason for them to be pulling back.”
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