Oil Sinks Almost 4% and Analyst Says $30 is Likely Unless OPEC Deepens its Cuts

Oil on Wednesday dropped nearly 4 percent on news that weaker demand at the start of the summer driving season has resulted in gasoline inventories rising 2.1 million barrels last week; and concern over the global glut is such that one respected analyst predicts $30 per barrel prices unless the Organization of the Petroleum Exporting Countries (OPEC) deepens its production cuts - and fast.

West Texas Intermediate fell $1.73 to settle at $44.73 per barrel, the lowest close since November 14; Brent dropped $1.72 to settle at $47 per barrel.

Gasoline stockpiles are now at 242.4 million barrels, according to the International Energy Agency; distillate supplies surged to 151.4 million barrels and refinery utilization rose to 94.4 percent.

John Kilduff, founding partner at Again Capital, remarked, "A gasoline inventory build is the last thing the bulls need; it's really counter to what we should be seeing this time of year."

Jackie DeAngelis, host of CNBC's Squawk Box, added, "Traders are telling me about $43.50 is the next support level from here; after that, $42 [is] certainly not out of the question."

The hand-wringing over oil breaching the $45 level notwithstanding, presumably the drop is great news for those worried about U.S. shale: Bloomberg reports that "drillers are suddenly contemplating the possibility of retrenchment" and that Mizuho Securities cites rising service costs and the industry's lack of hedging protection for next year along with depressed prices for U.S, growth outlooks being tenuous at best.

Mizuho's argument is supported by UBS AG analysts who think $45 "slows most U.S. shale plays" and at $40 companies will "hit the brakes" on growth even in the Perinan.

However, the ingenuity of U.S. shale players has constantly been underestimated by the analytical community, and Bloomberg concedes that driller sat a recent energy conference "insisted they were sticking with their spending plans even with the price decrease."

The question is, what would happen at $30-$35 per barrel?

That is precisely the price level Fereidun Fesharaki, founder and chairman of consulting group FGE, predicts crude will drop to unless OPEC makes additional cuts to production: "The problem is that there is too much oil on the market; there is too much oil from the U.S., too much oil from Libya, too much oil from Nigeria."

He added, "You have to cut another 700,000 barrels per day right away or prices will sink, [and] even if you do this, next year you'll still have to cut more, so it comes down to how far the Saudis are prepared to cut."

Such is the state of the global glut that even if Fesharaki's wishes came true, the benefits of deeper cuts could be mitigated by traders keeping crude in storage in the hopes of selling down the line at higher prices.

A trader who fixes storage deals told Reuters,"If contango lasts, it's very possible that the amount of tankers used for storage rises back to levels seen earlier this year"; and this, stated Reuters, would undermine the impact of supply cuts led by OPEC, "which partly aimed to force traders holding oil in storage to sell to reduce bloated inventories that have sapped global prices."

Earlier this week, none other than OPEC itself admitted that its efforts to reduce the glut have not gone as planned: it stated in it latest monthly report that "The rebalancing of the market is under way, but at a slower pace, given the changes in fundamentals since December, especially the shift in U.S. supply from an expected contraction to positive growth."