Oil prices dropped by 1 per cent on Tuesday, extending falls from the previous session as global financial markets headed south in the wake of one of the biggest intra-day falls ever registered on Wall Street.
Brent crude oil futures were at $66.93 per barrel at 03.52 GMT, down 69 cents, or 1 per cent, from the previous close. That was more than $4 below their high-point for 2018, hit last month.
US West Texas Intermediate crude futures were at $63.45 a barrel, down 70 cents, or 1.1 per cent, from their last settlement and more than $3 off their 2018-high.
Financial markets went into a tailspin on Monday when US stocks plunged in highly volatile trading which saw the Dow Jones Industrial Average tumble by almost 1,600 points in intra-day trading, its biggest ever point-to-point loss within one trading session, as investors grappled with rising bond yields and potentially firming inflation.
US S&P 500 futures tumbled 2.5 per cent to four-month lows in Asian trade on Tuesday, as the sell-off triggered by worries about inflation showed no sign of abating.
“Suddenly, inflation has become one of the most-talked about issues in markets,” US bank JP Morgan said in a note to clients.
However, the correction in oil is more than a reaction to the sell-off in financial markets.
Despite efforts led by Opec and Russia to withhold production since January last year in order to tighten the market and prop up prices, crude supplies remain relatively ample.
That’s largely due to soaring US oil production, which has jumped by almost 18 per cent since mid-2016 to 10 million barrels per day (bpd) - surpassing output by leading exporter Saudi Arabia.
Only Russia produces more, averaging 10.98 million bpd in 2017.
What’s more, there are indications that US oil output will rise further: the amount of rigs drilling for oil fields rose to 765 by late January, easily more than double the 316 that were in operation during 2016’s production lull.
There is also a seasonal downturn to demand, as many refineries shut for maintenance following the upcoming end to the peak-consumption winter heating season in the northern hemisphere.
The largest US refinery, Motiva Enterprises’ 603,000 bpd Port Arthur facility in Texas, began a planned one-month overhaul on Monday of its key crude oil processing unit.
Consequently, hedge fund managers have cut their bullish exposure to petroleum for the first time in six weeks.