So much for that recovery in oil prices.
After having rebounded strongly in recent days, the resource experienced its biggest loss in two months on Wednesday night after data revealed a bigger-than-expected increase in domestic crude supplies.
Following the closure of several hundred oil rigs around America, recent figures indicated that supply growth may have finally peaked which eased the market's concerns. However, as reported by The Wall Street Journal (WSJ), the most recent data showed the largest weekly increase in domestic crude supply in 14 years with 10.9 million barrels added to the nation's stockpile.
With an inventory level of 482.4 million barrels currently, supplies haven't been this high since 1930 (based on monthly data), according to the WSJ.
While West Texas Intermediate (WTI) crude surged to its highest price of the year on Tuesday at US$53.98 a barrel, it slid 6.6% to US$50.42 overnight. Meanwhile, Brent crude, which is the global benchmark, fell 6% to US$55.55 a barrel. Both contracts are still hovering roughly 50% below the levels recorded in June last year.
As expected, Australian investors have reacted negatively to the overnight plunge. The big players, being BHP Blliton Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO), have dropped 1.2%, 2.8% and 3.2% respectively, while Origin Energy Ltd (ASX: ORG) and Sundance Energy Australia Ltd (ASX: SEA) have fallen 1.2% and 3% each.
Where to now?
As has been widely reported, the downward pressure on the resource's price is due to a massive increase in production around the world, combined with a decrease in global demand. Plenty of analysts have expressed when they think US production rates will peak, with some suggesting it will happen next month while others believe it will peak in June.
Regardless of when production peaks however, we're still stuck with hundreds of millions of barrels in excess supply which will likely keep prices low for some time yet. As such, investors in the sector could still endure plenty more pain before conditions begin to improve.
