Crude futures closed lower Thursday after the dollar rose and a closely watched report slashed Germany's economic growth forecast.
ICE November Brent crossed below $90/barrel for the first time since June 2012, falling as low as $89.90/b before settling $1.33/b lower than Wednesday's close at $90.05/b.
NYMEX November crude finished the day $1.54 lower at $85.77/b.
In refined products, front-month NYMEX ULSD settled down 3.93 cents at $2.5366/gal, while NYMEX November RBOB closed 4.35 cents lower at $2.2749/gal.
The dollar gained ground Thursday, putting downward pressure on oil prices, after retreating Wednesday when minutes from the latest Federal Reserve meeting delayed expectations of an interest rate hike.
In Europe, a semi-annual report by leading German think tanks pegged the country's economic growth at 1.3% this year and 1.2% in 2015, a downward revision compared with their earlier forecast of 1.9% and 2%.
IMF chief Christine Lagarde said the eurozone could fall into recession unless actions are taken, AFP reported.
"I thought the risks of an economic slowdown, ample supply and strong dollar had been priced in, but the market can't seem to find any traction," Gene McGillian, analyst at Tradition Energy, said.
"The primary factors that have been pushing down prices continue to be present as the market hunts for a bottom," he said.
Another bearish sign has been the change in term structures for front month/12th month spreads, especially over the last week.
Over that time, the NYMEX crude future curve has become less backwardated, while the ICE Brent future curve has become more in contango.
The shift toward contango is evidence of a well-supplied crude market, Dennis Gartman, publisher of the Gartman Letter, said.
"Crude, in other words, is now bidding for storage across an entire year; supplies are large; demand is lessening and competition amongst the leading exporters is becoming more and more and ever more intense. The term structures don't lie," he said.
Contango is when prices are less expensive for front-month delivery, while backwardation is the opposite situation -- a front-month contract is more expensive than later delivery.
One consequence of the contango market has been stockpiling by Chinese buyers, Barclays analysts said in a note Thursday.
Stockpiling has mitigated the impacts of global production cuts, while also creating a crude overhang, they said.
"The rapid demand contraction, dollar strengthening and unexpected Libyan output return has lowered prices, and in combination with the contango, shields the market from a disruption in supplies from Libya, Iraq or other OPEC countries," the bank analysts said.
Barclays revised downward their crude forecasts for the fourth quarter by $13/b, predicting prices will average $93/b for ICE Brent and $85/b for NYMEX crude.
As prompt Brent flirts with $90/b, a move lower could trigger fresh selling, amid growing open interest in bearish put options at strike prices between $85-$90/b.
Energy Aspects analysts in their weekly note warned that a move toward $85/b would do just that, especially considering the record short position that has been built up by money managers.
ICE Commitment of Traders data released Tuesday showed speculative shorts rose to a record high 163,923 contracts for the week ended September 30.
"[V]arious producer hedges between $75 and $85 expose many banks (who are short these put options) to falling prices and could risk creating significant downside and volatility in the market as banks may be forced to sell flat price in order to cover their options books," the analysts said.
"It is not a given that prices are necessarily falling below $85, but if they do, the amount of short put options held by banks can lead to a downward spiral."
Swap dealers -- many of which are market makers at investment banks -- saw long positions grow to 349,032 contracts over the same period, their highest so far this year.
Open interest in Brent November $90 puts was around 4,499 lots Wednesday, with around 625 lots traded. Open interest at this strike has been growing since the beginning of summer, as prompt Brent prices have sunk from more than $114/b in mid-June. Open interest in the $90 put was just 300 lots on July 1, ICE data showed.
Open interest in the November $85 put has also risen, up to 2,273 lots on Wednesday from around 300 lots on July 1. But 132 lots have traded so far Thursday, up from nothing over the past three trading days. Volume for the $90 put shows 285 lots traded Thursday.
Open interest data is delayed one day.
