Oil's incredible four-day run came to an abrupt halt overnight with West Texas Intermediate (WTI) crude suffering one of its worst single-day losses in history.
After having risen nearly 20% between Thursday and Tuesday, WTI crude plummeted roughly 9% to settle at US$48.45 a barrel after the United States reported a huge weekly build in crude supplies. Data from the US Energy Information Administration shows that the nation's stockpile grew to 413.06 million barrels, its largest level since record-keeping began in 1982. That reflects a jump of 6.3 million barrels for the week – a figure much higher than global markets had been expecting.
Brent crude, the global benchmark, also suffered. After it too had risen roughly 20% in just four days, climbing to its highest level in more than a month, it settled down more than 6% to just above US$54 a barrel.
No end in sight
In the space of just seven months, oil prices have collapsed nearly 60% in what was the second worst oil glut in history. The recent rally, sparked by the closure of 93 oil rigs in the US and the likelihood of several hundred more over the coming months, provided a sense of hope amongst investors that the rout had finally found a floor.
The latest fall will certainly dampen that confidence with investors once again focusing on the market's hefty oversupply situation. One problem is that the US is dead-set on maintaining its energy independence, while OPEC (Organisation of Petroleum Exporting Countries) producing nations are refusing to give up market share – possibly producing even more in order to offset the lower prices.
Another theory is that the problem could be more of a demand-side issue than a supply-side issue, caused by waning global demand and forecasts of weak global economic growth. While it is unclear exactly where oil prices will go in the short term, you can be sure it'll be a volatile ride wherever it's going.
That's why it might be a good idea for investors to avoid the temptation to buy companies such as Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY) or BHP Billiton Limited (ASX: BHP), for now. With many analysts predicting further falls for the resource over the coming 12 months, each of those stocks represent risky bets for your money.
