U.S. crude oil fell for a fifth straight session on Thursday as traders and funds liquidated long positions to shake some heavy length out of the market only to repurchase those contracts once the market hit a one-month low, causing a dramatic price reversal late in the day.
Speculative funds and traders held a record net long position, indicating they believe prices will rise, in the week to July 23, according to U.S. government data. Though they shaved off a small fraction of that position last week, there's still enough bulk in the market to cause sharp moves, market watchers said.
Thursday's move was all about the bears "looking for any excuse to sell this market after it put in a top to take profit," said Rich Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago.
U.S. crude oil rallied by about $11 from July 1 to July 19, hitting a 16-month high of $109.32 a barrel as traders bet its discount to international benchmark Brent would narrow as increased pipeline capacity helped clear a glut of crude in the U.S. Midwest.
Speculators sold long positions to book gains then started buying them back once the move was overdone, Ilczyszyn and other brokers said.
Front-month U.S. crude oil futures ended the day 97 cents lower at $103.40, after trading as low as $102.22. Volume in the front-month West Texas Intermediate (WTI) contract hit its highest level in a month, according to Reuters data.
Brent crude oil prices had pared some losses in afternoon trading after a rise in tension in the Middle East.
Front-month Brent crude oil ended the session 76 cents lower at $106.68, after hitting a low of $105.85, also its fifth session settling lower.
U.S. RBOB gasoline futures tumbled to a one-month low of $2.81 per gallon and had led the oil complex lower during most of the session, traders and analysts said. RBOB also rebounded and settled at $2.85 per gallon.
SPREAD TRADING/NORTH SEA
Brent's premium to WTI <CL-LCO1=R> widened to a one-week high of $3.84 before settling at $3.28 per barrel. The widening spread was indicative of "a little unwinding" of the spread trade and "rolling of contracts", Ilczyszyn said.
Brent oil prices were also weighed down as exports from the North Sea are scheduled to rise in September.
That news offset the fact that imports of crude oil into China, the world's second-largest oil consumer, hit a record high.
The 2013 Atlantic hurricane season is still on track to be "above normal" though extreme weather is less likely, the top U.S. government climate agency said. Oil infrastructure in the Gulf of Mexico is vulnerable to storms.
MIDEAST UNREST SUPPORTS
In Libya, workers' protests remain a key concern. Libya's production is expected to fall further as workers at its Arabian Gulf Oil Company (AGOCO) plan to progressively reduce output in protest over management changes and the company's structure.
Also contributing to lower supply is Iraq, where exports are set to fall sharply in September as major work is carried out at its vital southern export terminals.
In Yemen, the government said on Wednesday it had foiled a plot by al Qaeda to seize two major oil and gas export terminals and a provincial capital in the east of the country, while U.S. drone strikes killed eight suspected al Qaeda militants in Yemen on Thursday.