Investing.com -- U.S. crude futures fell below a key technical level on Friday plunging under $40 a barrel for the first time since 2009, amid a slight build last week in oil rigs nationwide.
On the New York Mercantile Exchange, WTI crude for October delivery traded between $39.89 and $41.39 a barrel, before closing at 40.42, down 0.90 or 2.17% on the session. U.S. crude futures closed lower for an eighth consecutive week, marking the longest weekly skid in more than 29 years. Texas Long Sweet futures are now down by more than 22% over the last month of trading, as few signs appear of any reduction in the glut of oversupply in global energy markets.
On the Intercontinental Exchange (ICE), brent crude for October delivery wavered between $45.09 and $46.52 a barrel, before settling at 45.43, down 1.16 or 2.52% for the day. The spread between the international and U.S. benchmarks of crude stood at $5.01, below Thursday’s level of 5.34 at the close.
WTI crude dipped below $40 shortly after oil services firm Baker Hughes (NYSE:BHI) released its weekly U.S. rig count early in the afternoon trading session. Last week, U.S. oil rigs ticked up by two to 674 for the week ending on August 14, marking the fifth consecutive week of weekly builds. The oil rig count has steadily increased toward the latter end of the summer, after experiencing more than 25 weeks of weekly declines earlier this year. Nevertheless, the U.S. oil rig count is still substantially lower than its level last fall when it peaked above 1,600.
Beyond the symbolism attached with the latest drop in U.S. crude prices, the downturn could represent a fundamental shift in how oil is drilled throughout the country. When crude prices drop below $40, they fall outside the “shale band,” a gauge used by producers to monitor output levels. By rule of thumb, when crude drops below Friday’s level a large percentage of shale producers are forced to cut output due to lower profit margins. Alternatively, when crude prices move above $60, it provides shale producers with more flexibility to drill at higher levels.
In late-1985, the last time crude endured a weekly slump as long as its current skid, oil prices plummeted to $10 a barrel from its previous level of around $30 over a five-month period. The oil crash was provoked by a strategic decision from OPEC to increase output as a way of regaining market share. The initiative draws parallels to a controversial move from OPEC last November to maintain its production ceiling above 30 million barrels per day, reportedly in an effort to undercut U.S. shale producers.
Over the last nine months, crude prices have plunged more than 50% as surging production has disrupted the supply-demand balance in markets throughout the world. Last week, U.S. crude production fell by 47,000 barrels to 9.348 million barrels per day, around its lowest level since early-May. While output remains near its highest level in more than 40 years, it continues to wane amid declining U.S. shale production. Saudi Arabian output, meanwhile, hovers around 10.5 million barrels per day, as OPEC production remains near record-highs.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.75% to an intraday low of 94.84, its lowest level since late-June. By comparison, the index surged to a multi-month high of 97.69 earlier this month, underscoring the rapid decline in the dollar.
Dollar-denominated commodities such as crude become more expensive for foreign purchasers when the dollar appreciates.