Oil futures tumbled Tuesday as the International Energy Agency lowered its forecast for demand, calling into question a key element of oil's recent rally.
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U.S. crude futures fell $1.06, or 1.87%, to $55.70 a barrel on the New York Mercantile Exchange, making for their biggest single day decline since Oct. 6. Brent, the global benchmark, fell 95 cents, or 1.5%, to $62.21 a barrel on ICE Futures Europe.
Stronger-than-anticipated demand has been one of the reasons oil prices have gained about 20% since early September. But in its closely watched monthly oil report, the International Energy Agency cut its crude demand growth outlook by 100,000 barrels a day for 2017 and 2018, citing the impact of higher prices and a mild start to winter. The agency now expects demand to grow by 1.5 million barrels a day this year and 1.3 million barrels a day next year.
That change, while modest, could be enough to delay the process of bringing down an oil supply glut, and the new forecast sparked a selloff that deepened throughout the day, analysts said.
"All year long the IEA has been revising upward its forecast for demand. Now they're tempering that enthusiasm," said Andy Lipow, president of Lipow Oil Associates. "As a result the market is under pressure. The feeling is we need every bit of growth we can muster to soak up the oversupply situation."
Oil prices have hovered around multiyear highs, buoyed by geopolitical turmoil in the Middle East and support from the Organization of the Petroleum Exporting Countries' ongoing effort to eliminate about 2% of global supply with the help of external producers.
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But the IEA said that if the supply disruptions and geopolitical tensions that have helped fuel higher prices prove to be temporary, "a fresh look at the fundamentals confirms the view we expressed last month that the market balance in 2018 does not look as tight as some would like, and there is not in fact a 'new normal'" for prices above $60.
At current production levels global stocks will be unchanged in 2018, the IEA said. Commercial petroleum stocks in the Organization for Economic Cooperation and Development -- a group of industrialized, oil-consuming nations, including the U.S. -- fell below 3 billion barrels in September for the first time in two years, but the IEA attributed much of that to the impact of Hurricane Harvey.
Some analysts say the IEA may be too cautious in its projections.
"We are now projecting small draws [next year] even before factoring in an extension of the cuts beyond March 2018," said Richard Mallinson, an analyst at consultancy Energy Aspects.
Analysts at Tudor, Pickering Holt & Co. said the sharp declines in inventories since the beginning of the year indicate that the market isn't oversupplied.
"Inventories are the compass pointing toward an energy recovery. Come on into the tent...the revival is just getting started," they wrote Tuesday.
And the data come a day after OPEC raised its forecasts for world oil demand growth for this year and next. The cartel now expects consumer appetite for oil to rise by 1.53 million barrels a day in 2017 and 1.51 million barrels a day in 2018. The IEA's outlook also differs from OPEC's with regard to how fast the oil market is rebalancing. OPEC's latest estimate points to the oversupply in the market receding if the cartel keeps its supply at current levels.
Although it is common to have variations in oil market projections, some analysts view the discrepancy between the IEA and OPEC as unusually large.
"It will create some volatility as the market is going to be split between those that think the IEA is too much on the bearish side," said Olivier Jakob, managing director at consultancy Petromatrix, who views the IEA's forecast as better linked to movements in crude prices.
Still, investors are also watching for additional oil flows coming from the U.S.
On Monday, the Energy Information Administration said it expected U.S. shale oil output to rise by an additional 80,000 barrels a day and "reach a record 6.17 million barrels per day in December," said Commerzbank analysts.
On Wednesday morning, markets will watch for weekly EIA data on U.S. oil inventories. Analysts surveyed by The Wall Street Journal are expecting, on average, to see declines in both crude-oil and fuel supplies.
The American Petroleum Institute, an industry group, said late Tuesday its data for the week showed a 6.5 million-barrel increase in crude supplies, a 2.4 million-barrel rise in gasoline stocks and a 2.5 million-barrel decline in distillate inventories, according to a market participant.
Gasoline futures fell 3.17 cents, or 1.77%, to $1.7612 a gallon. Diesel futures fell 2.51 cents, or 1.3%, to $1.9070 a gallon.
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(END) Dow Jones Newswires
November 14, 2017 17:41 ET (22:41 GMT)