Oil Opens Lower on Oversupply

NEW YORK (DTN) -- New York Mercantile Exchange oil futures opened lower Monday morning on a stronger dollar and the prospect of a nuclear deal with Iran that would lead to more oil flowing to an already oversupplied global oil market. The downside was curbed by a new monthly report from the Organization of Petroleum Exporting Countries that boosted its outlook for global crude oil demand.

“Oil inventories continue to build,” said Barclays Capital, “however, the rise in the second quarter has more to do with refined products than just crude oil. Geographically, stock builds are now being seen outside North America.”

“A Greek deal and a possible Iran deal is giving oil mixed signals,” said analyst Phil Flynn at Price Futures. “On one hand, it seems that a deal in Greece will allow the market to focus on the more positive data that has been coming out of the Eurozone. On the other hand, the market is fearful that an Iran deal will flood an oversupplied market.”

At 8 a.m. CDT, the NYMEX August WTI crude contract was down 64 cents at $52.10 bbl, off a three-day low of $51.26. The ICE August Brent crude futures contract slid 98 cents to $57.75 bbl. The Brent premium over WTI narrowed 37 cents to $5.62 bbl.

In products trade, the NYMEX August ULSD contract was down 2.61 cents at $1.7138 gallon, off a four-day low at $1.7360. The NYMEX August RBOB contract slumped 4.69 cents to $1.9696 gallon, off a three-day low of $1.9621.

On Wall Street, equities were higher Monday morning while the dollar advanced.

The dollar strengthened versus the euro despite a last-minute agreement by eurozone lenders to provide Greece with $95 billion in bailout funds in exchange for a three-year program of stringent austerity involving tax hikes, spending cuts and pension reforms that must still be passed by the Greek parliament by Wednesday.

The deal came after Prime Minister Alexis Tsipras capitulated, agreeing to austerity terms that were harsher than those Greeks rejected last week in a referendum. Under the agreement, Greece would sell state assets with proceeds put in an escrow fund to pay for the loans in case of a default. Tsipras said it averts the collapse of the banking system and an exit from the euro. Banks in Greece will remain shuttered until Wednesday.

Eurozone leaders said they don't trust Tsipras, who a week ago rejected austerity and who is expected to have a difficult time convincing parliament to ratify the measures after members of his leftwing party rebelled. As a result, the market remains skeptical about Greece and viewed the deal with weary relief rather than jubilation, said analysts.

Separately, diplomats told reporters they were closing in on a deal that could allow Iran to export more oil in exchange for tough limits on Iran's nuclear program. There were conflicting reports on whether a deal would be announced Monday, but most reports said key issues have been resolved.

The expected agreement would limit Iran's nuclear capability for more than a decade in return for sanctions relief staggered over a long period of time. A few issues need to be worked out before the announcement, according to media reports.

Iran produced 2.8 million bpd of crude oil last year, down from 3.7 million bpd in 2011 when tough sanctions were imposed on Tehran, according to the Energy Information Administration.

On fundamentals, OPEC said in its Monthly Oil Market Report for July that world demand for oil is expected to grow 1.34 million bpd in 2016 after a projected year-on-year increase of 1.28 million bpd in 2015. That reflects an upward revision of demand forecast by 100,000 bpd vs. a month ago.

OPEC adjusted its expectations for this year on stronger-than-estimated demand in the first quarter at 91.76 million bpd, with the world's consumption of oil in 2015 projected at 92.61 million bpd.

Oil supply growth by non-OPEC countries for 2015 was revised up 220,000 bpd to 860,000 million bpd for total supply at 57.39 million bpd. The growth rate in new non-OPEC oil supply is projected to slow in 2016 by 300,000 bpd to 57.69 million bpd.

OPEC estimates U.S. oil supply growth at 13.85 million bpd in 2015, revised up 230,000 bpd from June to 930,000 bpd of additional supply versus 2014, peaking in the fourth quarter at 13.92 million bpd. In 2016, U.S. oil supply is seen expanding by 330,000 bpd to 14.18 million bpd.

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