Oil Lower on China Fears, Supply Glut

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower Thursday afternoon after coming under late selling pressure from a glut of supply and renewed fears China’s economic slowdown would soften demand for oil, while a weaker U.S. dollar and technical support limited the downside.

“There’s negative mood in the market because of China…the concern now is that the China slowdown will hurt demand for oil and industrial metals,” said analyst Phil Flynn at Price Futures Group. “It was all about risk-aversion trade today.”

Flynn said the concern over China’s economy was renewed by a Wall Street Journal article today quoting hedge fund manager Ray Dalio of Bridgewater, who has issued a negative outlook on the world’s second biggest economy and oil consumer. Dalio and his firm, the world’s largest hedge fund that turned a profit in 2008, was previously a long standing bull on China’s economy.

NYMEX September West Texas Intermediate crude futures dropped 74 cents to a $48.45 bbl settlement, paring a decline to a near four-month spot low at $48.21, with support at $48.00. ICE September Brent crude was down 86 cents to a $55.27 bbl settlement, and near a 3-1/2 month spot low of $55.10 bbl. The September Brent premium over WTI narrowed 12 cents to $6.82 bbl.

In products trade, the NYMEX August ULSD futures contract settled 1.71 cents lower at $1.6546 gallon, off a two-day low of $1.6491. August RBOB futures posted settled 1.55 cents lower at $1.8521 gallon, trimming a decline to a better-than three-month spot low of $1.8456.

Earlier, the oil complex had seesawed on either side of Wednesday’s settlement, with the WTI contract finding support from a weakening U.S. dollar, which eased to a one-week low versus the euro and five other foreign currencies following Greece’s approval of reforms that pave the way for a three-year bailout package.

Excess supply has been a key concern for the market this week. The Energy Information Administration's weekly data showed an unexpected 2.5 million bbl crude stock build for the week ended July 17 on Wednesday. The supply build lifted U.S. crude inventory to 463.9 million bbl, up 25.0% year on year.

The crude supply build came despite robust demand from refiners, which operated at a strong 95.5% of capacity. The high run rate also means more gasoline and distillates are being produced while the end of the summer peak driving season is around the corner, with the Labor Day holidays considered the end of the gasoline season, analysts said.

Globally, the Organization of Petroleum Exporting Countries is producing above the agreed 30 million bpd ceiling, and the market is concerned that last week's nuclear deal would flood the market with additional supply from Iran. That's bearish for ICE Brent futures.

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