Oil Opens Lower on Supply Glut

NEW YORK (DTN) -- New York Mercantile Exchange oil futures were lower Monday morning alongside falling global equities, with excess oil supply also adding downward pressure on the oil complex. However, the downside was curbed by a weaker dollar and positive durable goods orders in the United States.

The market sees a surplus of diesel and crude oil, partly because oil shale producers haven’t been deterred by low oil prices, while seasonal demand for domestic gasoline is expected to weaken by Labor Day, the traditional end of the summer peak driving season, said analysts.

A stock market rout that started overnight in China spread to Europe and the United States. The Shanghai composite index plunged 8.5% -- the biggest one-day drop since 2007, on risk-aversion, as investors became worried the rally seen in the past three weeks prompted by government intervention was unsustainable.

The stock market is a barometer for investor confidence and the rout seen Monday raised concerns about an economic slowdown and oil demand growth in China, the world's second-largest economy and consumer of oil after the United States, analysts said.

NYMEX WTI crude futures, which entered a bear market last week after falling more than 20% since their peak on May 6, are facing more headwinds in the second half of the year, analysts said.

At 9 a.m. CDT, NYMEX September crude futures were down 73 cents to $47.41 bbl after trading at a fresh four-month spot low of $47.20. ICE September Brent dropped $1.01 to $53.61 bbl, near a 4-1/2 month spot low at $53.36 bbl.

In products trade, the NYMEX August ULSD contract was down 2.76 cents at $1.6026 gallon, off a 6-1/2 month spot low at $1.5969. NYMEX August RBOB futures were down 1.15 cents at $1.8167 gallon, off a 3-1/2 month spot low at $1.8113.

On Wall Street, U.S. equities were down for the fifth straight day, with the dollar index also lower. The dollar fell to a two-week low versus the euro after the Info Institute’s latest data showing business confidence in Germany improved as the Greek debt crisis eased.

U.S. economic data are positive, with the Commerce Department reporting durable goods rose a more-than-expected 3.4% in June from May due to strong demand for aircraft. The Federal Reserve is expected to raise interest rates later this year.

Analysts also pointed to a continued oil supply glut in the global market, unexpected increase in the number of rigs for oil drilling in the U.S. last week that suggested oil shale producers aren't capitulating in the face of low oil prices.

The Energy Information Administration's data issued last week 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.

Baker Hughes on Friday reported the U.S. oil rig count climbed by 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 rig count is still down some 60% from the October peak.

Overseas, the Iran nuclear deal signed two weeks ago would allow Tehran to increase its oil exports, adding pressure on oil prices. Iran is expected to boost exports by as much as 1.0 million bpd from current level by next year.

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