U.S. oil futures settled higher on Tuesday, but analysts warned that a global supply glut and a potential slowdown in Chinese demand could help pull prices below $40 a barrel.
September WTI crude tacked on 75 cents, or 1.8%, to settle at $42.62 a barrel on the New York Mercantile Exchange. On Monday, prices shed 1.5% to settle at $41.87, the lowest settlement level for a front-month contract since March 2009. “Fears of a sustained slowdown in China is oil’s biggest hurdle,” said Phil Flynn, senior market analyst at Price Futures Group. But “China is throwing a lot of money and stimulus which could keep oil demand strong,” and that’s likely providing some support to oil prices, he said.
And “we should see a draw down in crude supply reminding us that despite the glut, U.S. refining demand is at record highs,” he said. The American Petroleum Institute will release its weekly report on inventories late Tuesday, while the U.S. Energy Information Administration issues its own data Wednesday morning. Citi Futures forecasts a decline of 1.5 million to 2.5 million barrels in crude stockpiles. On the ICE Futures exchange in London, October Brent crude settled higher after a three-session losing streak, up 7 cents, or 0.1%, at $48.81 a barrel. “The pressure is off WTI as it has retested its lows from earlier in the year,” said Matt Smith, director of commodity research at ClipperData. “Brent still needs to apparently meet its destiny with a retest too. The spread between Brent and WTI has widened recently … and we are seeing some narrowing of that for now.”
Still, Richard Hastings, macro strategist at Global Hunter Securities, said that the bias for oil is lower. He said $39 a barrel is “easily achievable for WTI crude oil in the coming week.” “Fundamentals like China demand and OPEC production are tiny incremental effects” for oil prices, he said. “The dominant element at this time is sentiment.”