Oil Down 40% From Oct Highs; Sub-$40 Possible By Year-End, Some Say

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Investing.com – The machines are in control of the oil market, with real-life traders already in holiday mood, pushing crude prices to a 16-month bottom and toward the bears’ long-desired technical target of low $40s per barrel.

And some say even sub-$40 for a barrel may be possible before the year-end.

U.S. West Texas Intermediate oil settled down 7%, the third time in four weeks that the market has fallen as much. WTI has lost 40% from four-year highs of $76.90 per barrel struck in early October, a phenomenal $30 drop in 10 weeks, as worries about a potential global recession pile on top of a glut feared in crude supply.

The sheer plunge has some traders talking about WTI possibly testing $40 support, the market’s bedrock, before trading closes for 2018.

“Oil is getting no respect whatsoever at this stage and we’ve totally lost control of the narrative,” said Phil Davis, founder of PSW Investments in New York. “It’s too crazy to be involved in this market. I’m not short, neither long and I wouldn’t rule out anything at this stage, including a test of $40, though that’s a huge support.”

Tariq Zahir, managing partner at Tyche Capital Advisors in New York, concurred. “Yes, we could take out $40 before the year closes, though we’ll have better clarity on that after tomorrow’s EIA,” he said, referring to the weekly supply-demand report on crude and other petroleum products due on Wednesday from the U.S. Energy Information Administration.

Analyst believe the EIA will report that U.S. crude stockpiles fell for a third straight week last week, with the latest deficit being around 2.5 million barrels.

That positive projection was no help to Tuesday’s market.

U.S. crude settled down $3.64, or 7.3%, at $46.24 per barrel, after plumbing an August 2017 low of $46.12 earlier.

U.K. , the global oil benchmark, was down $3.53, or 6%, at $56.08 per barrel. The session low was $56.87, a bottom since Oct 2017.

Just two months ago, few oil traders would have dreamt of such prices when WTI hovered above $75 per barrel. Many Wall Street analysts even mumbled about $100 Brent when the U.K. benchmark topped nearly $87 in early October.

Now, no matter how positive a piece of data or market development — be it a drawdown in U.S. inventories or force majeure in Libya — the selloff continues, albeit with a brief rise or pause.That has given rise to the notion that algorithms, more than people, were deciding trades.

“I still see a lack of willing buyer in the market overall , which is probably the larger issue as the algos smell that out and continue to generate weakness to stop out even the smallest of longs,” Scott Shelton, a Durham, N.C. based analyst and broker for ICAP (LON:) said in his daily note.

A surfeit of both positive and negative news flooded the market, making it harder to discern a bullish case for oil, if anything.

Libya’s National Oil Company (NOC) declared force majeure on operations at the country’s largest oilfield, El Sharara, a week after the firm announced a contractual waiver on exports from the field following its seizure by militants. At stake was 315,000-barrels-per-day (bpd) pumped by El Sharara and also 70,000 bpd pumped by the El Feel field located south of that.

Bloomberg reported that Russian Energy Minister Alexander Novak planned to meet with executives from local oil companies on Wednesday to discuss the OPEC+ deal and targets for a joint production cut of 1.2 million barrels per day over the next six months. Russia planned to cut 228,000 bpd within the first quarter, it said.

But a Reuters report that Russia pumped a record 11.42 million bpd this month offset any positive sentiment from the impending cuts.

Also weighing on the market was a monthly report by the U.S. Energy Information Administration that said oil production from the seven major U.S. shale basins was expected to surpass 8 million barrels bpd by the end of the year. The United States is already the world’s largest crude producer with 11.7 million bpd.

Saudi Arabia’s own crude exports in October rose to 7.7 million barrels per day from 7.433 million bpd in September, official data showed on Tuesday.