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Crude falls sharply, as investors re-assess impact of Canadian wildfires

Published 05/09/2016, 02:28 PM
Updated 05/09/2016, 02:35 PM
Both Brent and WTI fell more than 2% on Monday to close below $44

Both Brent and WTI fell more than 2% on Monday to close below $44

Investing.com -- Crude futures fell sharply on Monday, erasing gains from the overnight session, as energy traders reassessed the impact of severe wildfires throughout Western Canada even as officials cautioned that the firestorms could rage on for months.

On the New York Mercantile Exchange, WTI crude for June delivery traded in a broad range between $43.36 and $45.94 a barrel before settling at $43.47, down $1.19 or 2.71% on the session. With the significant losses, U.S. crude futures halted a four-day winning streak. On the Intercontinental Exchange (ICE), brent crude for July delivery wavered between $43.51 and $46.48, before closing at $43.62, down 1.75 or 3.86% on the day.

WTI crude has narrowed its deficit with brent over the last several weeks after Saudi Arabia rattled markets on April 17 by abruptly cutting a meeting in Doha short by insisting that Iran participate in a comprehensive production freeze.

In Alberta, thousands of people continued to evacuate the area boosting the total of residents forced from their homes above 100,000, as catastrophic fires in the area showed little signs of slowing. Officials in Fort McMurray turned off the gas in the small Alberta town, amid signals that a local power grid had been damaged, while declaring its local water supply to be undrinkable. In total, three major pipelines and nearly a dozen production firms ceased operations as their workers vacated the area. Although oil facilities in the region were not damaged by the storms, approximately 1 million barrels or one-third of the nation's total daily production had been taken offline. The storms forced Syncrude Canada Ltd, one of the largest oil sands operators in the nation, to suspend activities for the time being.

"Syncrude has successfully suspended operations at both Aurora and Mildred Lake sites. Both facilities will remain in "safe park" mode until the wildfire and smoke no longer pose a risk to workers or our infrastructure," the company said in a statement. "Syncrude will restart operations only when its safe to do so and there is no risk to personnel or facilities."

While officials warned that the storms could potentially last for months, energy traders re-evaluated the long-term impact of the natural disaster on global oil prices. At current levels, daily production in Canada represents less than 5% of the world's total output.

Meanwhile, crude prices faced pressure to the downside after the U.S. Commodity Futures Trading Commission (CFTC) reported that short positions in oil increased by 1,500 versus bullish positions for the week ending on May 3. During the week, long positions in oil fell by 15,700 to 530,000, while short positions decreased by 14,300 to 211,500.

Elsewhere, energy traders also reacted to news that Saudi Arabia replaced longtime energy minister Ali al-Naimi with Khalid al-Falih, the chairman of state-owned oil company Aramco. Saudi officials insist they will maintain their current pricing strategy in spite of the change in leadership.

"Saudi Arabia will maintain its stable petroleum policies," Al-Falih said in a statement.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, surged more than 0.30% to an intraday high of 94.18 before falling slightly to 94.11 early in the afternoon session. The index is still down approximately 6% since early-December. Dollar-denominated commodities such as crude become more expensive for foreign purchasers when the dollar appreciates.

Despite the recent upswing in oil prices, crude is still down roughly 40% from its level in November, 2014, when OPEC roiled markets with a strategic decision to abandon its long-term pricing strategy in an effort to increase market share.

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