Market Overview

Oil Extends Slide as Inventories Soar

Oil futures extended a precipitous slide following the release of weekly inventory data earlier Wednesday. The U.S. Energy Department said crude inventories surged by 5.9 million barrels last week to 375.1 million barrels, more than triple the 1.8 million barrel inventory build analysts expected. On Tuesday, the American Petroleum Institute reported a 313,000-barrel increase in its weekly report.

NYMEX-traded crude for December delivery slid as much as one percent following the Energy Department, falling below $86 per barrel. The benchmark U.S. oil contract has not closed below the $86 per barrel level since July. The U.S. Oil Fund (NYSE: USO), which tracks front month oil futures, is off 1.5 percent in mid-day trading. That ETF has tumbled 7.4 percent in the past month and almost five percent in the past 90 days.

While part of the inventory build can be attributed to increased production at various U.S. shale plays, it also indicates economic activity in the U.S. remains sluggish because the U.S. is the world's largest oil consumer. Even before Wednesday's inventories report, crude stockpiles were at elevated levels for this time of year.

Waning demand and a lethargic economic recovery have plagued oil equities this year as well. Despite the fact that the SPDR S&P 500 (NYSE: SPY) is up 12.6 year-to-date, Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) have not been able to keep pace with the broader market. Exxon and Chevron (the two largest U.S. oil companies) are up 6.3 percent and 3.2 percent, respectively, this year.

Those returns likely frustrate investors that have seen other high-beta sectors rally at various points this year. Adding to investors' woes is the fact that the Energy Select Sector SPDR (NYSE: XLE) is the most correlated sector SPDR to SPY, according to State Street data.

Oil could receive a near-term pop if Iran makes good on its threat to halt exports if the U.S. and Europe move forward with economic sanctions against the OPEC member. Sanctions have already clipped Iran's oil production. A year ago, the country was pumping 2.5 million barrels per day, but today that number has dwindled to just 800,000 barrels.

The Eurozone has previously been a prime destination for Iranian crude, but China is now the top purchaser of Iranian oil. China is the second-largest oil consumer in the world behind the U.S.

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