Oil Hit by Fears of Decelerating Demand

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange slumped on Wednesday, with West Texas Intermediate settling 4.25% lower after government data confirmed another build in U.S. crude oil inventories.

WTI, Brent settled near five-month lows Wednesday afternoon, as surging U.S. petroleum stockpiles reignited concerns over a slowing domestic economy and lackluster fuel demand. Energy Information Administration said on Wednesday domestic crude and product inventories increased last week to a 23-month high despite a lower U.S. production rate and continued efforts by Organization of the Petroleum Exporting Countries to drawdown global petroleum stocks. U.S. commercial crude oil inventory increased 44.1 million barrels (bbl) or 10% so far in 2019, with the supply build more pronounced in the second quarter, which also coincides with the tariff hike on Chinese imports and a lower domestic manufacturing output.

In refined products, EIA data showed gasoline stocks increased 800,000 bbl to 234.9 million bbl in the first week of June, which was also the fourth consecutive weekly build. Despite a sizable 436,000 barrel-per-day (bpd) spike in gasoline demand for the profiled week, the broad picture for gasoline consumption remains nearly flat at 9.235 million bpd against a year ago. Distillate supply was drawn down 1 million bbl last week, widening a year-on-year supply surplus by 1.1 million bbl to 13.7 million bbl or 11.9%.

Government data showed domestic crude production eased 100,000 bpd from a 12.4 million bpd record high during the first week of June, which follows Tuesday's forecast that U.S. crude production would average 12.4 million bpd in 2019. Goldman Sachs expects U.S. production to surge further in the second half of the year, as new infrastructure in the Permian Basin comes online, exerting price pressure on the oil market.

Wednesday's declines for both benchmarks came even as price-boosting policy of OPEC+ production targets imminently approaches its expiration. Goldman Sachs said on Wednesday OPEC+ cuts are only "modestly" supportive for oil prices in the environment of uncertainty over U.S.--China trade war and a knock-on effect on global fuel demand.

Reuters reported China's crude oil imports tumbled 11% in May to average 9.47 million bpd, in line with a broader declines in Chinese imports. According to data from China's General Administration of Customs, the country's imports registered an 8.5% year-on-year decline in May, pointing to weakness in the domestic economy. U.S. President Donald J. Trump said on Monday he would immediately raise additional tariffs on China, if he cannot make progress in trade talks with Chinese President Xi Jinping at the G-20 Summit later this month.

EIA revised down on Tuesday its forecast for world oil consumption for both 2019 and 2020 from month prior, with global supply projected to outpace demand by 26,000 bpd in 2020.

"Demand-side concerns became the most salient issue during the past month and contributed to volatility and price declines for risk assets such as commodities and equities" said EIA in its Short-term Energy Outlook released on Tuesday.

NYMEX July West Texas Intermediate futures settled down $2.13 at $51.14 bbl with losses accelerating late Wednesday afternoon, and Brent crude on the Intercontinental Exchange settled below $60 bbl for the first time since Jan. 28. NYMEX July ULSD futures were down 4.22 cents near $1.7799 gallon, while July RBOB futures tumbled 7.02 cents to settle at $1.6861 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

(CZ)