Oil prices fell Tuesday as investors reassessed demand for the commodity amid the recent decline in equity markets.
Major U.S. stock indexes are down after reaching record highs in recent weeks, with the Dow Jones Industrial Average on track Tuesday to fall for the seventh consecutive session. Since many commodities traders use stock markets to gauge demand for oil, declines in stocks "bled over" into oil and "spooked" traders, said Bob Yawger, director of the futures division at Mizuho Securities USA Inc.
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"When the market buckles like that, maybe the demand in place wasn't as healthy as you thought," Mr. Yawger said.
U.S. oil for September delivery recently fell 67 cents, or 1.7%, to $39.39 a barrel on the New York Mercantile Exchange. October contracts for Brent, the global benchmark, fell 50 cents, or 1.2%, to $41.64 a barrel. U.S. oil is in a bear market after falling below $40.98 on Monday, putting it down more than 20% since early June.
U.S. oil had briefly threatened Tuesday to break out of its bear market, with many bargain buyers stepping in after oil settled below $40 Monday for the first time in three months. As oil has fallen from $50 a barrel in June, fewer U.S. producers are likely to break even, according to many investors who have been betting that this is the point in which supply starts to shrink.
But many also believe that $35 oil is still a distinct possibility as U.S. oil producers put rigs back to work, Libya gets ready to return to the oil-exporting markets and output increases appear likely from prominent Organization of the Petroleum Exporting Countries members. That all comes as a glut of gasoline and other fuels is likely to cause refineries to slow, analysts have said.
"The world is so oversupplied and the pace of rebalance is so slow that even geopolitical factors, such as the continuing civil strife in Nigeria, are not enough to offset the fall in prices," said Gao Jian, an energy analyst at SCI International.
Both U.S.- and Asian-based refineries are entering seasonal maintenance periods, likely to slow their crude buying even more. The reduced refining rate "will add to the supply backlogs as crude flows will have nowhere to go," said Stuart Ive, a client manager at OM Financial.
"This seasonal drop in prices does still have room to target $35 before maybe reversing toward the end of the year," he added.
Increased drilling activity in the U.S. also indicates it may take longer than expected for supply and demand to rebalance. Active U.S. oil rigs have risen in eight of the nine weeks since oil hit $50, lifting the count by 18%, according to industry group Baker Hughes Inc.'s data,
"The latest forecasts from the U.S. Energy Information Administration also suggested that the supply response to the recent lift in oil prices could see U.S. oil output stabilize in early 2017, after having fallen recently," HSBC said in a commodities note.
The rig count is still down nearly 77% from a record reached in October 2014.
The oil glut is being felt most acutely in the U.S., with forward cover of oil held in commercial storage enough to satisfy domestic demand for 70.45 days at the end of June, up from 68.18 days six months earlier, despite demand increasing by 100,000 barrels a day, brokerage PVM said.
Gasoline futures recently gained 0.1 cent, or 0.1%, to $1.3049 a gallon. Diesel futures gained 0.3 cent, or 0.3%, to $1.2545 a gallon.
--Timothy Puko contributed to this article.