Oil Gets Crushed as Price Correction Gains Momentum

© Provided by CNBC
© Provided by CNBC

Oil is expected to spiral even lower, as concerns about global growth collide with record production and the potential for more supply from Iran.

West Texas Intermediate crude futures plunged 7.7 percent Monday and were in official correction territory, with a decline of more than 11.5 percent since July 1. Brent was more than 6 percent lower.

Oil plummeted on fresh worries that Greece’s anti-austerity referendum could lead to its exit from the euro zone, creating negative fallout across the region’s economy.

“The drop in oil is going to stop, but not for now,” said Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch. “You’ve got every cylinder pointing south. You don’t want to try to grab this falling knife.”

Other factors that contributed to the drop were apparent movement in Iran’s nuclear negotiations and new focus this weekend on China’s stock market collapse. The stronger dollar could also add pressure, as the euro skids.

Strategists see the floor for WTI oil at around $50, but some say it could continue to fall toward the lows of about $42 from mid-March.

WTI crude futures settled down nearly 8 percent Monday, down $4.40 at $52.53 per barrel.

“This week is a huge week. We have two things that people in the markets have been worried about literally for years, and they’re both happening at the same time,” said Michael Wittner, head of commodities research Americas at Societe Generale. “The oil market is a little twitchy,”

Strategists say the market is worried about potential Greek contagion that would impair the European economy. But the situation is unclear, and the uncertainty could stretch on for weeks, which could also dampen economic activity and keep the market on edge.

“On the Iran deal, I think people are waking up to the fact that Iran is … saying it wants to double its exports once the ban is lifted,” said John Kilduff of Again Capital.

Blanch said while there is no agreement yet, the deal over Iran’s nuclear program appears closer and the market is beginning to price in the flow of Iranian oil.

“If a deal gets done this week, maybe it’s a few more dollars down. That may be a buying opportunity,” Blanch said. Blanch said the 30 million to 40 million barrels Iran currently has in floating storage could be on the market fairly quickly.

Negotiators have set a deadline of this week for the talks between Iran, the U.S. and five other powers. Iran is reportedly pushing for a complete lifting of the United Nation’s arms embargo.

Views vary on how quickly Iran will start to get more oil out onto the world market if there is a deal.

“I think oil markets understand very well, depending on what gets decided one way or the other, it’s going to be months,” said Wittner. “The only thing fast is the floating storage, but again, that’s going to have to wait until restrictions are lifted.”

Analysts agree it will take time for Iran to reach its potential. “You’re going to have 600,000 barrels a day of incremental supply heading into the middle of next year,” Blanch said. “All of that in my view creates a very negative backdrop for the oil market.”

As for China, traders have been watching its high-flying stock market melt down.

“So far, it’s the stock market. The argument is whether the Chinese government is worried. Are they acting aggressively on the stock market because they are worried about the real economy?” said Wittner. “That’s the issue. It’s too early to say on that one.”

But markets have been worried about slower Chinese growth, and the China stock market collapse has the potential to hurt the broader population of individual investors.

Blanch said another catalyst for lower prices will come with the Fed’s interest rate hikes, expected to begin later this year or early next year, because they could have a negative impact on emerging market economies.

A more near-term negative for crude, however, could be the slowdown in U.S. gasoline demand, expected to be peaking this week with Fourth of July holiday driving.

Blanch does expect some relief with a pending slowdown in U.S. oil production, so far holding near 40-year highs of 9.6 million barrels a day. He said the lower prices could make production to decline by 500,000 barrels a day, before picking up again some time next year.

Strong U.S. production has also been met by a pickup in Saudi Arabian production, also believed to be near record highs.

Gene McGillian, an analyst with Tradition Energy, said the market is waiting for new data on traders’ positioning, expected later Monday. As of last week, longs outnumbered shorts by a wide margin.

“The question is, does the market hold $50 and do we pivot back to the $40s?” he asked, adding at some point the longs could start bailing, adding further pressure on prices.

Written by Patti Domm of CNBC

(Source: MSN)

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