WTI hits 2-year lows as Saudis cut prices

West Texas Intermediate (NYMEX:CLZ14) dropped to the lowest level in more than two years after Saudi Arabia reduced the cost of its oil to U.S. customers in the face of soaring North American output.

Futures tumbled 2.2% in New York. Saudi Arabian Oil Co. cut prices for all grades to the U.S., the company said today in an e-mailed statement. The state-owned producer, known as Saudi Aramco, will sell Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, compared with a November discount of $1.05. U.S. crude imports from Saudi Arabia fell to a four-year low last month.

“The Saudi move speaks to them wanting to preserve market share in the U.S., where it has slipped recently,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “It looks like the Saudis are comfortable with prices and demand.”

WTI for December delivery fell $1.76 to close at $78.78 a barrel on the New York Mercantile Exchange. It was the lowest settlement since June 28, 2012. Prices lost 12% last month, the most since May 2012, and are down 20% this year. The volume of all futures traded was 9.7% above the 100-day average at 3:30 p.m. in New York.

Brent (NYMEX:SCZ14) for December settlement declined $1.08 to $84.78 a barrel on the London-based ICE Futures Europe exchange. Futures dropped 9.3% in October. Volume was 7.8% lower than the 100-day average. The European benchmark crude traded at a $6 premium to WTI, compared with $5.32 on Oct. 31.

Market Share
Oil tumbled last month after Saudi Arabia, Iraq, Iran and Kuwait cut prices, leading to concern that OPEC members were fighting for market share. OPEC output rose to a 14-month high in October, according to Bloomberg estimates.

“If you have bullish oil bets you have to be on the verge of suicide,” Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said by phone. “This should have been a bullish event for Brent. Instead there was a slaughter.”

U.S. crude oil imports from the desert kingdom slipped to 609,000 barrels a day the week ended Oct. 3, according to preliminary data from the Energy Information Administration.

Demand for imports in the U.S. has fallen as the shale boom moved the country closer to energy independence. Crude output rose 0.4% to 8.97 million barrels in the week ended Oct. 24, the most since at least January 1983, according to EIA estimates. U.S. crude production will grow by a million barrels a day this year and next to reach 9.5 million in 2015, the most since 1970, the EIA said in its monthly Short-Term Energy Outlook on Oct. 7.

Market Reaction
“The market is reacting as though Saudi Arabia is going to flood the Gulf and is going to compete with shale production,” Michael Hiley, head of energy OTC at LPS Partners Inc. in New York, said by phone.

Oil has collapsed into a bear market as leading members of the Organization of Petroleum Exporting Countries resisted calls to cut production even amid signs of slowing global demand. Members of the group, which pumps about 40% of the world’s crude, are engaged in an internal “price war” as they seek to defend their share of an oversupplied market, Iraqi Oil Minister Adel Abdul Mahdi said last week.

OPEC pumped 30.974 million barrels a day last month, the most since August 2013, according to a Bloomberg survey of oil companies, producers and analysts. The group is scheduled to meet next on Nov. 27 in Vienna.

‘Very Volatile’
“There’s a lot of crude out there,” Sarah Emerson, managing principal of ESAI Energy Inc. in Wakefield, Massachusetts, said by phone. “This market is going to remain very volatile. I wouldn’t be surprised if Brent tested $80 by the end of the year, but it could just as easily test $95.”

U.S. refineries operated at 86.6% of their capacity in the week ended Oct. 24, down 0.1 percentage point and the lowest level since March, according to the Energy Information Administration. Refiners schedule maintenance for September and October as they transition to winter from summer fuels.

“It looks like the Saudis are waiting for winter demand to bail them out,” Kilduff said.

December gasoline futures decreased 2.4% to settle at $2.1176 a gallon on the Nymex. Ultra low sulfur diesel for December delivery slipped 1% to $2.4899 a gallon.

Regular gasoline at U.S. pumps fell below $3 a gallon for the first time since December 2010 on Oct. 31. The average retail price dropped to $2.98 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.

Dollar Strength
The dollar strengthened to an almost seven-year high versus the yen. A rising U.S. currency reduces the appeal of raw materials such as oil and gold as a store of value.

“The strength of the dollar continues to weigh on the commodities,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. “This is an established trend and appears set to continue.”

Money managers reduced net-long positions in WTI by 2.3% in the week ended Oct. 28, data from the U.S. Commodity Futures Trading Commission showed. Long positions, or bets on rising prices, retreated to the lowest level in 17 months. Net- long positions for Brent rose 3.8% to 54,715 contracts in the same period, according to data from ICE Futures Europe’s Commitments of Traders report.

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