Oil futures suffered their largest weekly loss in five months on Friday and prices still have room to fall below $40 a barrel before the year is done.
August West Texas Intermediate crude settled Friday at $45.41 a barrel on the New York Mercantile Exchange, up 0.6% for the session, but tallying a drop of 7.3% for the week.
“Oil had a huge rally off the bottom” for prices in February under $30 a barrel, but “has been looking increasingly exhausted as it struggles with $50—above which the potential for U.S. production to return emerges,” said Colin Cieszynski, chief market strategist at CMC Markets.
Prices tried to several times in May and June to sustain a price above $50 a barrel, but they have settled above that key level less than a handful of times so far this year. They finished Thursday at a two-month low.
James Williams, energy economist at WTRG Economics, said there were two major factors that drop prices lower this week, in particular.
The Energy Information Administration reported Thursday that domestic crude stockpiles fell 2.2 million barrels. That paled in comparison to the 6.7 million-barrel drop reported by the American Petroleum Institute a day earlier, though was somewhat close to fall of 2.6 million barrels expected by analysts surveyed by S&P Global Platts.
“The API report modified expectations and when they were not met, oil sold off,” said Williams.
The market is also coming to the “realization that product inventories are very high and we are about two months from the end of the summer driving season,” he said. “while oil stocks are 12.6% higher than last year, gasoline and distillate (diesel and heating oil) are up 9.6% and 8.4%, respectively.”
Thursday’s settlement saw WTI oil prices down $2.29 a barrel, but gasoline lost 69.8 cents gallon—or $2.93 barrel. “If we had no other information than prices, the conclusion would be that oil prices were led lower by products,” said Williams.
Read: ‘Undertow’ could drag oil back below $40 a barrel
But oil-related news has whipsawed prices in recent weeks.
The continuing concerns over a slowdown in China and the U.K.’s vote to exit the European Union have weighed on expectations for energy demand, but the market has also seen weekly declines in U.S. crude production.
News that Royal Dutch Shell plans to resume exports from a 200,000 barrel-per-day oil terminal in Nigeria contributed to oil’s latest losses, though that was somewhat countered by the claim of another attack on Chevron Corp. facilities in the country, said Williams.
Then there are expectations that oil exports from Libya may rise following a merger pact between two rival Libyan oil companies.
With the potential for a revival in Nigerian output, an improvement in the Libyan political situation and the market facing high gasoline inventories as the summer driving season “begins to slowly wind down,” it will be hard for prices to find support above $50, and maybe not above $45,” said Michael Lynch, president of president of Strategic Energy & Economic Research.
Williams said he expects U.S. production to continue fall for the remainder of the year, providing some support for oil prices.
Prices are most likely to “fluctuate” in the $45 to $55 range for the remainder of the year, he said.
But Darin Newsom, DTN senior analyst, went a step further. He sees potential for a price drop to as low as $35.84 a barrel.
Traders may continue to sell crude oil based, in part, on a stronger U.S. dollar, Newsom said. For the week, the ICE U.S. Dollar Index was up roughly 0.7%.
Commercial oil traders, which include those that use the futures market to hedge business activities, have a bearish view of supply and demand, given the strong contango in the market’s forward curve, said Newsom. Contango means that near-month futures are cheaper than those expiring further into the future.
“I think $35.84 might be the lower limit crude oil could fall to,” said Newsom.
The time frame for that is difficult to predict, he said, but it could be “as little as a couple of weeks, to a much as a couple of months.”