Oil prices slumped on Wednesday, driving major benchmarks to their lowest closing levels since early October, after OPEC and the International Energy Agency warned of impending oversupply and rising COVID-19 cases in Europe increased the downside risks to demand recovery.
Brent crude futures fell $1.36, or 1.7%, to $81.05 a barrel by 12:18 p.m. EST (1718 GMT). U.S. West Texas Intermediate (WTI) crude futures settled at $78.36, down $2.40, a 3% decline.
The declines took Brent to its lowest close since October 1 and U.S. crude to its lowest settlement since October 7. Traders said the market's recent action suggests funds are weighing a greater likelihood that supply will start to outpace demand in coming months, with sharp declines in near-term futures pointing to funds closing long positions.
"It signals a movement towards balance which weâ€™ve not seen for many months," said Tony Headrick, energy analyst at CHS Hedging.
The global oil market has been focused on the swift rise in demand against a slow increase in supply from the Organization of the Petroleum Exporting Countries and its allies, along with reluctance from big U.S. shale players to overspend on drilling.
However, both the IEA and OPEC in recent week said more supply could be coming in the next several months. OPEC and its allies, known as OPEC+, have maintained an agreement to boost output by 400,000 bpd every month so as not to overwhelm the market with supply.
On Tuesday, OPEC Secretary General Mohammad Barkindo said the group sees signs of an oil supply surplus building from next month adding its members and allies will have to be "very, very cautious."
Other nations, including the United States, have called for OPEC+ to boost output more swiftly. The United States has considered announcing an emergency release of crude from its Strategic Petroleum Reserve, which contains more than 600 million barrels of oil.
In what is perhaps a signal of that possibility, in the last two weeks the U.S. Energy Department has sold more than 6 million barrels of oil - part of previously approved sales.
The United States currently has discretion to sell several million barrels from the SPR thanks to previous Congressional approval. J.P. Morgan analysts said Wednesday that the White House could speed up those sales rather than declare an emergency - calling it the "easiest of the options the White House has" to combat rising fuel prices.
The IEA has already said that U.S. supply is expected to increase at a swifter pace in the second quarter of 2022, and U.S. rig counts have been rising, with private operators seeking to take advantage of higher crude prices. The IEA expects U.S. output will account for about 60% of its forecast of 1.9 million barrels per day (bpd) for non-OPEC supply growth in 2022.
U.S. crude oil inventories fell by 2.1 million barrels last week, the latest government data showed, running against analyst expectations for a build of 1.4 million barrels. Headrick noted, however, that the modest build in inventories at the key Cushing, Oklahoma hub of 213,000 barrels was a signal that the drawdowns of late may be coming to an end.
New waves of COVID-19 cases in Europe have driven some governments to reimpose restrictions, including Austria, which has ordered a lockdown on unvaccinated individuals.
The Biden administration on Wednesday asked the Federal Trade Commission to investigate the growing gap between the cost of unfinished gas and what consumers are paying at the pump.