Oil drops to 27-month low near $92 as supply glut grows

NEW YORK — Oil prices fell for the third straight session on Thursday, with Brent hitting its lowest level since June 2012, continuing a three-month long rout as a global supply glut and concerns about demand persisted.

For US crude, some support was found from government data that showed an unexpected decrease in unemployment claims over the past week. Monthly employment data is due on Friday which economists expect to show an increase in the size of the labour force.

But overall, the sentiment remained bearish as supply from key producing regions including the United States and Middle East remained strong while economic data from Europe and Asia hinted at weak demand.

Sharp cuts in Saudi Arabia's oil sale price to Asian customers on Wednesday came as the clearest sign yet that the world's largest exporter is trying to compete for crude market share and keep the market well supplied.

"This is a structural change in the oil market, with Saudi Arabia explicitly stating that they are willing to compete on price," said Bjarne Schieldrop, chief commodities analyst at SEB in Oslo. "I think Brent will fall below $88 before we see the bottom of the market."

Brent crude for November delivery fell $1.76 to $92.40 by 1554 GMT. It earlier hit $91.55, its lowest since June 2012.

US November crude lost 71 cents to reach $90.02 per barrel, after earlier sinking to $88.18, its lowest intraday level since April 2013.

Brent's premium over US crude  was at about $2.4 on Thursday, its lowest since August 2013.

Oil declined alongside European stocks as the European Central Bank (ECB) left interest rates unchanged on Thursday, as expected. ECB President Mario Draghi said that a planned bond purchase programme would last at least two years. US stocks also fell.

Some analysts said a cut in production from the Organisation of the Petroleum Exporting Countries (OPEC) at its meeting next month was the only move that could enable a price recovery.

With such steep losses in oil prices since June, others said that oil prices were likely to move higher.

"I don't think we have much potential to keep going lower," said Carl Larry, head of consultancy Oil Outlooks. "We are at the bottom of the range and there is a lot of room to go up."

Oil production in Russia increased by almost 0.9 per cent month-on-month in September to 10.61 million barrels per day (bpd), energy ministry data showed. 

The price of oil, the world's most important fuel source, has dropped 20 per cent since the summer.

Energy analysts initially said the price declines were largely the result of greater supply, citing the North American shale boom, the tapping of new offshore reserves worldwide and greater output of coal.

But analysts have also begun pointing to a slowdown in demand. They cite China's ebbing thirst for oil and what could its first drop in demand for coal in over a decade as indicators of a sharper slowdown in the world's second-biggest economy.

"China's initial [economic] acceleration has faded. With the US acceleration reaching its limits, we have seen our GLI [Global Leading Indicator] slip into 'slowdown'," Goldman Sachs said on Thursday in a research note. "Without re-acceleration outside the US, this may not change quickly." 

According to Goldman, China could still get close to its economic growth target of 7.5 per cent for this year, but "there is a good chance of more slowing early next year".

That would have profound implications worldwide, since the economies of China and the United States have been growing, while Europe and Japan continue to struggle in the wake of the financial crisis.

Demand shrinks, supply rises

Further affecting demand for fossil fuels, households and industries in developed economies are becoming more efficient in using energy and are moving more to renewables and other alternative fuel sources.

"Ironically, as the global demand pie is getting smaller, supplies [of fossil fuels] are increasing," indicated Michal Meidan, a director at consultancy China Matters.

Coal, the world's most important source for electricity generation, has almost halved in value since spring 2011 to levels at which most producers are losing money.

Gas prices in Europe have fallen over 6 per cent this year despite the crisis between Russia, its main supplier, and Ukraine, a vital transit route for European Union (EU) imports.

China's gas demand growth is expected to ease to its slowest in three years in 2014 and dip again in 2015, due in part to its slowing economy.

In the oil market, moves by Saudi Arabia, the world's biggest exporter, are crucial to determine volumes and pricing.

"Serving as a bearish signal, Saudi Aramco has cut official selling prices [OSPs] for November loading cargoes to all regions... The biggest cuts were again seen in Asia, the third consecutive round of downwards adjustments there," JBC Energy indicated in a research note.

The recent rise in the dollar has mitigated oil price declines in Europe and Japan, but Reuters data show that the price drop in oil has far outpaced the fall in the euro and the yen against the greenback.