Oil Lower on Fear of Greek Default

NEW YORK (DTN) -- New York Mercantile Exchange oil futures ended lower Monday afternoon on growing fears about a possible Greek debt default and supply overhang. Traders also squared positions ahead of Monday's expiration of the July Brent futures contract on the IntercontinentalExchange.

The Greek crisis threatens Eurozone economic recovery and oil demand while crude oil production continues to increase in the United States and overseas.

"Petroleum markets are under selling pressure with long liquidation from the expiring July Brent contract widening the July/August spread to a super contango," said analyst Tim Evans at Citi Futures in New York. "The weakness in the July/August spread is also calling fresh attention to oversupply in the physical crude oil market, with increased output from both the U.S. and OPEC attracting wider attention."

NYMEX July WTI crude futures settled down 44 cents at $59.52 bbl, off a $58.73 four-day low. ICE July Brent futures expired $1.26 lower at $62.61 bbl, off a $62.24 one-week low. The August Brent contract settled 69 cents lower at $63.95 bbl. The Brent premium over WTI narrowed 82 cents to $3.09 bbl at the close, the smallest premium since Jan. 26.

In products trade, NYMEX July ULSD futures settled 1.89 cents lower at $1.8703 gallon, off a four-day low of $1.8556. The July RBOB futures contract slid 2.20 cents to a $2.0991 gallon settlement, off a four-day spot low of $2.0849.

On Wall Street, U.S. equities fell after investors were spooked after Greek debt talks broke down on Sunday without a deal.

The talks stalled after Greece refused to make about $2 billion in pension cuts demanded by lenders who include the European Union and the International Monetary Fund. Analysts fear Greece won't be able to make the required $1.8 billion debt payment to the IMF due at the end of the June if it doesn't reach a deal with creditors, analysts said.

The market fears a possible knock-on effect for the Eurozone economy if Greece defaults and exits the shared euro currency. But investors are also keeping watch over mixed U.S. economic data ahead the Federal Open Market Committee's Tuesday-to-Wednesday meeting. The Fed has said its decision on when to raise federal funds rates will be data-dependent. An FOMC decision to hike rate would impact the dollar and oil prices.

The Empire State index dropped 5.07 points to minus 1.98 in June, a worry because the market had expected another gain after a rebound of 4.3 points to 3.09 in May. Nationally, U.S. industrial production slipped unexpectedly by 0.2% in May from a revised minus 0.5% in April, U.S. Federal Reserve's data showed.

On supply, oil services firm Baker Hughes reported a 27th decline of nine active oil rigs to a 12-1/2 year low of 859 for the week-ended June 12. Still, domestic oil production rose nearly 200,000 to 9.61 million bpd, the highest in about three decades, Energy Information Administration said.

At 470.6 million bbl as of the week-ended June 5, domestic crude oil supplies plunged 6.8 million bbl yet were still nearly 22% higher than a year ago and remain near levels not seen for this time of year in at least the last 80 years.

Overseas, the Organization of Petroleum Exporting Countries is producing 31 million bpd, 1.0 million bpd above its official production ceiling and the highest production rate since October 2012, said analysts. Libya's crude oil exports have risen to 500,000 bpd while Saudi Arabia promised to increase its oil production in the coming months despite the fact that it already produces a record 10.33 million bpd.

The International Energy Agency last week said global crude oil production remains "exceptionally high" and would continue to overshadow demand in 2015 despite the slowdown in U.S. drilling.

George Orwel can be reached at george.orwel@telventdtn.com