IEA Warning Drives Crude Oil into 2009 Lows

February WTI Crude Oil futures weakened on Friday after the International Energy Agency (IEA) warned that global oversupply could worsen in 2016. Nearby January WTI Crude Oil futures breached the $36.00 level for the first time since 2009. Based on the current downside momentum, the market appears to be headed towards the 2008 bottom at $32.40.

 Brent Crude Oil fell below $39.00 per barrel for the first time since December 2008 after the IEA warning. In 2008, Brent fell as low as $36.20 per barrel. According to the IEA, the combination of overproduction and slowing demand growth should continue to lead to increased supply in 2016.

“Consumption is likely to have peaked in the third quarter and demand growth is expected to slow to a still-healthy 1.2 million bpd in 2016, as support from sharply falling oil prices begin to fade,” the IEA said in its monthly report.

The IEA also said that the pace of stock-building should roughly halve next year and that it is very unlikely that global storage capacity would be filled.

“Concerns about reaching storage capacity limits appear to be overblown,” it said. The IEA said it expects a decline in non-OPEC production in 2016, as U.S. light oil shifts into contraction, and that further spending cuts could spur deeper output declines.

“There is evidence that the Saudi-led strategy is starting to work,” the IEA said, referring to the producer group’s decision to maintain high output to safeguard market share. Last week, OPEC failed to impose a ceiling on output. OPEC producers pumped more oil in November than in any month since late 2008, some 21.7 million barrels per day.

February Comex Gold futures continued to break and are on track to finish lower for a seventh week in eight as investors continued to position themselves ahead of next week’s widely expected U.S. interest rate hike on December 16. Higher interest rates are helping to boost the U.S. Dollar which should continue to put pressure on foreign gold demand. Gold traders should watch the price action in the stock indices because a sharp sell-off may lead to hedge buying in gold. This could trigger a late-session short-covering rally.

The EUR/USD traded higher on Friday after selling off on Thursday after testing the $1.10 level. Today’s price action is likely being driven by the “carry strategy”. The break in U.S. equities is encouraging investors to liquidate stocks and to pay back money borrowed from European banks.

Earlier today, Targeted LTRO was announced at 18.3 billion. The estimate was 7.5 billion.

The GBP/USD traded slightly better and in a tight range. In U.K. news, Construction Output was up 0.2%, missing the 1.1% estimate. Consumer Inflation Expectations came in at 2.0%. Later today, MPC Member Weale is scheduled to speak.

U.S. Core Retail Sales were 0.4%, beating the 0.3% estimate. Retail Sales were up 0.2%, matching the estimate. PPI was up 0.3% versus a 0.0% estimate. Core PPI was also 0.3%, better than the 0.2% estimate.

Preliminary University of Michigan Consumer Sentiment was 91.8, slightly better than the 91.3 reading last month, but below the 92.3 estimate. Business Inventories were 0.0%.