As U.S. crude wobbles near $40, new oil rally in doubt

Thu Aug 4, 2016 1:04am EDT
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By Barani Krishnan

(Reuters) - U.S. crude's slide below $40 a barrel this week has hardened the resolve of oil market bears to drive prices lower, with oversupply, refining cutbacks and a breakdown in the oil/dollar trade spelling an end to this year's rally.

Few believe oil will revisit the 12-year lows of $26 to $27 a barrel seen in the first quarter, but many are zeroing in on $35 a barrel or lower for U.S. crude. Short bets have increased in recent weeks as investors believe the spring rally that nearly doubled the price of oil took the market too far, too fast.

"The bandwagon trade just two months ago was that we will hit $60, but now $35 is looking like more of a reality," said John Kilduff, partner at New York energy hedge fund Again Capital.

"We're in a vicious cycle, with no sign of this glut in oil products disappearing anytime soon, while any cutback by refiners is backing up crude into the system. This tells me the rally is over," said Kilduff. He said he was using mostly options and futures positions to bet on $35 oil.

Crude inventories jumped by 1.4 million barrels in the most recent week, surprising forecasters who expected an identical draw. The build brought stockpiles, minus the U.S. strategic reserve, to an all-time seasonal high of 522.5 million barrels, according to the U.S. Energy Department.

OPEC oil producers are pumping near record high levels while top crude exporter Saudi Arabia cut prices for its Asian customers at the weekend, signaling another price war and tussle for crude market share.

West Texas Intermediate (WTI) crude settled below $40 on Tuesday for the first time since April. It ended Wednesday at $40.83 a barrel.

Tariq Zahir, an oil bear who trades mostly in timespreads of WTI, is betting the spot U.S. price will not hold above $40 for long.   Continued...

A pump jack stands idle in Dewitt County, Texas January 13, 2016. REUTERS/Anna Driver