Oil prices extended the previous sessions’ losses on Tuesday as financial markets remained volatile after a sharp sell-off in equities. Dollar strength and the onset of refinery maintenance season also weighed on futures. Crude oil futures sank in early morning trade as stock futures remained under pressure, with international benchmark Brent crude hitting a one-month low. U.S. West Texas Intermediate crude ended Tuesday’s session down 76 cents, or 1.2 percent, at $63.39, a more than two-week closing low. Brent was down 63 cents, or 0.9 percent, at $66.99 a barrel by 2:26 p.m. ET, after falling as low as $66.53 earlier in the session. Both contracts were down more than 3 percent since the stock market rout began on Friday, sparked by concerns about rising interest rates and inflation.
The Dow Jones industrial average closed down 1,175 points on Monday, posting its biggest point decline on record. On Tuesday, the Dow turned positive shortly after U.S. markets opened and was last 76 points lower in volatile trade. Losses in the oil market were limited, in part because the sell-off appeared to be fueled by concerns that stocks are overvalued, rather than fears that the economy is slowing down, said John Kilduff, founding partner at energy hedge fund Again Capital. A strong economy supports crude oil futures on the view that demand for energy will continue to grow. “It gets tricky because to the extent you see a flight to safety, which usually favors dollars and bonds, sometimes crude gets caught up in that because it’s seen as a hard asset,” Kilduff said.
The oil market decline has also been fueled by a stronger dollar and signs of stress in the physical market for crude. The correlation between crude oil and the dollar has reasserted itself recently. A stronger greenback, boosted on Friday by a better-than-expected U.S. jobs report, typically makes commodities sold in dollars more expensive to foreign buyers who hold other currencies. Refineries are also closing down or preparing to shut for maintenance, a seasonal event that temporarily suppresses demand for crude oil, the primary feedstock for refined fuels like gasoline, home heating oil and diesel. “We are heading into refinery maintenance season, and that is going to depress demand here in the United States over the next couple of months,” said Andrew Lipow, president of Lipow Oil Associates.
Oil market watchers should expect to see stockpiles of U.S. crude rise in the coming weeks, said Lipow, particularly in the region that includes the U.S. Gulf Coast refining hub. Surging U.S. supplies are somewhat offsetting the impact of OPEC’s deal with Russia and other producers to limit production. U.S. oil production nearly matched an all-time record above 10 million barrels a day in November, surpassing output from Saudi Arabia. On Tuesday, the Energy Information Administration projected that U.S. oil production averaged 10.2 million barrels a day in January.
Brent has fallen further than U.S. crude faster in recent weeks, shrinking its premium over WTI. The so-called Brent-WTI spread has narrowed to about $3.50. The difference in prices reached roughly $7 about a month ago. U.S. crude’s significant discount to Brent has made it more attractive to overseas refiners, helping to keep U.S. oil exports above 1 million barrels a day. The record is just over 2 million barrels a day.
