Oil prices dropped by more than 1 per cent on Tuesday, extending falls from the previous session as global financial markets tumbled lower in the wake of one of the biggest intra-day falls ever registered on Wall Street.
Brent crude futures were at $66.91 (£47.84) per barrel on Tuesday morning, down 71 cents, or 1.1 per cent, from the previous close. That was more than $4 below their high-point for 2018, hit last month.
US West Texas Intermediate (WTI) crude futures were at $63.46 a barrel, down 69 cents, or 1.1 per cent, from their last settlement and more than $3 off their 2018 high.
“The fall [in crude futures] is mainly attributable to a global sell off in equities,” said Sukrit Vijayakar, director at consultancy Trifecta Energy.
“People ran to the US dollar as a safe-haven currency. Therefore the dollar strengthens. This makes commodities more expensive to buy, hence oil futures get sold off,” he added.
Financial markets went into a tailspin on Monday after a sharp rise in US bond yields that raised alarms over rising inflation and potentially higher interest rates.
The Dow Jones Industrial Average’s 4.6 per cent loss on Monday was its largest in percentage terms since August 2011, and the day’s 1,175 point loss was its biggest ever in absolute terms. The index was briefly down more than 6 per cent.
US S&P 500 futures tumbled 3 per cent in Asian trade on Tuesday, extending Monday’s sell-off.
“Suddenly, inflation has become one of the most-talked about issues in markets,” US bank JP Morgan said in a note to clients.
The correction in oil is also being driven by fundamentals, traders said.
Despite Opec and Russia cutting production in order to tighten the market, crude remains in ample supply.
That is largely due to soaring US shale oil production, which has jumped by almost 18 per cent since mid-2016 to 10 million barrels per day (bpd), surpassing top exporter Saudi Arabia.
Only Russia produces more, averaging 10.98 million bpd in 2017.
And US oil output will likely rise further.
The amount of rigs drilling for oil rose to 765 by late January, 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 at the end to the peak-consumption winter 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.
Despite this, overall oil demand remains healthy, with US bank Goldman Sachs estimating 2018 growth of 1.8 million bpd, with 40 per cent of this coming from China and India alone.