By Jenny W. Hsu 
 

U.S. crude oil prices entered bear-market territory in early Asian trade Friday as a deluge of oil and refined products in the market triggered selloffs.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in September traded at $41.06 a barrel at 0300 GMT, down $0.08 in the Globex electronic session. September Brent crude on London's ICE Futures exchange fell $0.05 to $42.65 a barrel.

An expanding gasoline glut world-wide and early signs of increasing production in the U.S. and from the Organization of the Petroleum Exporting Countries have dragged down U.S. oil prices from a 52-week high of $51.76 hit on June 9. A raft of temporary factors, such as Canadian wildfires, oil workers strike in Kuwait, and militant attacks in Nigeria had helped push prices up from the $26 level in February.

However, as these temporary factors faded, investors began shifting their attention back to the fundamentals of the market which is tightening at a slower pace than previous expected, dragged by high OPEC production and the output from the U.S.

The market is down 20.4% since June, reflecting a bear market which is defined as a downturn of 20% or more.

Market players are also keeping a close eye on the Bank of Japan, which is expected to announce its interest rate decision and possible fresh stimulus measures to boost the economy later today. Any negative news from the BOJ could further weaken the Japanese yen and lift the greenback, said Barnabas Gan, an economist at OCBC.

As the oil business is mainly conducted in dollars, a rise of the currency makes oil more expensive for foreign buyers.

Investors will also be watching the weekly U.S. drilling report released later today for cues. Data from industry group Baker Hughes has shown an increase in oil drilling activities in the U.S for four consecutive weeks to 371 as of July 22.

"In addition to having more rigs drilling, the average productivity of rigs continues to increase," said the U.S. Energy Information Administration. In the three major oil producing regions of Bakken, Eagle Ford, and Permian, daily productivity picked up by 155 barrels, 226 barrels and 111 barrels, respectively per well, over the 2015 average.

In June, OPEC crude production increased by 264,000 barrels a day to average 32.86 million barrels, according to the cartel's monthly report.

The increased barrels come at a time when the refined market is becoming bloated as output outstrips demand. The fear is that the glut of fuels will erode appetite for crude in the coming months and suppress prices to below the $40 mark.

"The next support level is $40.50 with $38.60 behind on the daily chart," said Stuart Ive, a client manager at OM Financial. "Until there is an event to curtail the selloff, these levels are likely to be achieved in the coming weeks, especially if refineries start to pullback production due to the surplus gasoline levels," he said.

Traders and analysts are monitoring the trend of the U.S. oil rig count to gauge the bottom prices for the oil drillers. The point where oil rig count reverses the uptrend is likely the price level that U.S. producers no longer feel incentivized to drill, said Vivek Dhar, commodities strategist at Commonwealth Bank of Australia.

Nymex reformulated gasoline blendstock for August--the benchmark gasoline contract--fell 56 points to $1.3006 a gallon. ICE gasoil for August changed hands at $371.25 a metric ton, down $2.50 from Thursday's settlement.

Write to Jenny W. Hsu at jenny.hsu@wsj.com

(END) Dow Jones Newswires

July 28, 2016 23:25 ET (03:25 GMT)

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