Why Oil Prices Are Tumbling Again
Business + Economy

Why Oil Prices Are Tumbling Again


U.S. crude prices fell 4 percent on Wednesday, posting their biggest daily drop since April after oil stockpiles in the United States rose for the first time in more than two months.

The selloff was a jolt to crude traders and investors who have seen U.S. prices in fairly tight trading ranges over the past 10 weeks versus sharper moves down in European oil.

But many were not counting yet on a sustained break lower, pointing to the summer demand for oil in the United States, which seasonally supports prices through August.

"I don't think the transition to another price freefall will happen as quickly this time," said Scott Shelton, a commodities specialist, who also trades energy, for broker ICAP in Durham, North Carolina. "I see a slower grind lower and I don't think this the tipping point."

U.S. crude settled down $2.51, or 4.2 percent, at $56.96 a barrel. It's biggest slide before that was on April 8.

Brent crude closed down $1.58, or 2.5 percent, at $62.01.

That pushed U.S. crude's differential to Brent, one of the biggest plays in the oil market, to a discount of more than $5, the largest in three weeks.

The tumble in U.S. crude came after government data showed inventories rising by 2.4 million barrels last week. It was the first weekly build since April and ran contrary to a 2-million-barrel draw forecast by analysts in a Reuters poll on Tuesday. 

The dollar's rally on Greece's debt default, Iran's renewed efforts to reach a nuclear deal with the West to freely resume its crude exports and signs of OPEC output at three-year highs were other factors that weighed on the market. 

But while crude inventories rose, gasoline stockpiles fell by 1.8 million barrels last week, indicating strong demand for fuels from the peak U.S. summer driving season.

That implied to some that U.S. crude prices were not about to crash as yet, the way they did earlier this year, extending a selloff from the last summer to reach a six-year low of $42 in March.

"I don't think U.S. crude will be vulnerable to another major leg down until refiners' demand for gasoline starts to decline," said David Thompson, executive vice president at Powerhouse, an energy-focused commodities broker in Washington. "This could occur by September, when the autumn refinery turnaround starts."

Analysts think crude prices will take a severe hit before the year end, with U.S. oil drilling showing signs of recovery from 3-year lows while OPEC continues to pump relentlessly.

"A global selloff of crude is in the wind," said Donald Morton, a trader in Haverhill, Massachusetts, for investment bank Herbert J. Sims & Co.

(Additional reporting by Robert Gibbons in New York,; Alex Lawler in London and Henning Gloystein in Singapore; Editing by Meredith Mazzilli and Diane Craft)