Oil Ends Lower on Strong USD

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower Friday afternoon under pressure from a stronger U.S. dollar and a new weekly oil drilling report that exacerbated concerns about oversupply. The oil complex’s downside was also driven by a sell-off in U.S. equities on bearish sentiment, as risk-averse investors fled to the safety of the dollar and bonds.

Worries over a slowdown in China’s economy also added downward pressure on the complex, with the WTI contract swinging into a bear market this week, which is defined as a 20% drop from a recent peak. It plunged nearly $15 bbl from an early May high of $62.58 bbl to today’s multi-month low of $47.72.

“The rig count report pushed the oil market down at the end of the day, but also the biggest risk for the week is the wheels are coming off of China’s economy,” said analyst Phil Flynn at Price Futures Group in Chicago. “The only thing exciting the bulls is WTI closed above $48, so technical support is holding, which may give us a boost next week.”

Others agreed.

“Commodity markets including crude oil remain under selling pressure as early PMI measures for both China and Europe were weaker than expected,” said Citi Futures specialist Tim Evans in New York.

NYMEX September WTI crude futures settled 31 cents lower at $48.14 bbl while down $2.75 this week. ICE September Brent crude settled down 65 cents at $54.62 bbl, off a near four-month spot low of $54.30 and down $2.48 for the week. Brent’s premium over WTI narrowed 34 cents to $6.48 bbl.

In products trade, the NYMEX August ULSD futures contract was 2.44 cents lower at a $1.6302 gallon settlement, off a near six-month spot low of $1.6275 while losing 3.39 cents for the week. August RBOB futures settled 2.39 cents lower at $1.8282 gallon, off a 3-1/2 month spot low of $1.8148 while plunging 10.0 cents for the week.

On Wall Street, the major stock indices were down for the fourth straight day, with the Dow Jones Industrial Average and S&P 500 falling over 1.0% Friday to two-week lows. The dollar gained, however.

The greenback scaled back toward the three-month high posted last week, up to a two-day high Friday afternoon after bouncing off Thursday’s one-week low versus the euro and five other foreign currencies on strong U.S. economic data and weak manufacturing data in Europe and China.

London-based market data firm Markit reported its preliminary July purchasing managers’ index for manufacturing sector showing a rise from 53.6 in June to 53.8 in July, with the data coming on the heels of recent firm data on jobs and housing in the United States.

Readings above 50 indicates expansion, and this data bolsters the case for a federal funds rate hike later this year by the Federal Reserve. The Fed also accidentally released its confidential staff recommendation for a single rate hike this year, with the Fed set to meet in September and December.

Earlier, Markit showed PMI for China dropped to 48.2 points, the lowest in 15 months. Markit also said euro-zone's PMI dipped 0.2 to 52.2 points in July, with the weak economic data raising questions about projected oil demand growth in Europe and China, analysts said.

The key issue for oil traders was a glut of oil supply. Baker Hughes reported that U.S. rig count for the week-ended today climbed 19 to 876, while rigs in operation are down 1,007 from a year ago. The rig count has risen in three of the last four weeks, boosting domestic production to above 9.5 million bpd.

The Energy Information Administration’s data issued Wednesday detailed an unexpected 2.5 million bbl crude stock build for the week-ended July 17, lifting U.S. crude inventory to 463.9 million bbl, up 25.0% year on year.

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