It’s not been a good session for crude oil prices, and that’s putting it mildly.
They’ve copped a shellacking, undermined by the combination of another enormous inventory build in the US, renewed US dollar strength and near record-long positioning among speculative traders.
Both front-month WTI and Brent crude futures tumbled by around 5%, leaving them sitting at lows not seen since mid-December last year.
The percentage decline in WTI was the largest since February 9 last year. For Brent, it was the largest since June 24, 2016 — the day after the UK Brexit vote.
The daily chart from Thomson Reuters shows the damage. WTI is in while, Brent in blue.
To Viveh Dhar, mining and energy commodities analyst at the Commonwealth Bank, it was the build in US inventories that was the main factor behind the slump.
“Oil prices slumped after US crude oil stockpiles surged by 8.2 mmbbl [million barrels] last week, well above forecasts of a 1.3mmbbl increase,” he said.
“US oil inventories are now at the highest level since weekly stockpile data started being recorded in 1982.”
Coinciding with ballooning inventory levels, he said that US crude production levels are now nearing the record highs reported in mid-2015.
“In the same week, US oil output crept higher, to 9.09mb/d [million barrels per day], and is now only 0.5mb/d below peaks reached in June 2015,” he said, noting that “production was last at current levels in February 2016”.
Dhar says that has occurred thanks to higher prices, encouraged by production cuts announced by OPEC and non-OPEC producers in late 2016.
That agreement was centred around lowering production in the first half of this year. However, given the current state of the market, Dhar says it’s looking likely that they will need to be extended.
“It is increasingly looking like OPEC will need to extend supply cuts beyond mid year in order to meaningfully reduce the surplus in oil markets and keep prices elevated,” he says.
Whether that eventuates will likely be determined when OPEC meets in Vienna on May 25.
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