Oil Settles Mostly Down Thursday

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled mixed, with the West Texas Intermediate crude and ULSD contracts reversing lower as the dollar rose to a one-week high, with a stronger dollar offsetting data released Wednesday showing a weekly draw from domestic crude oil inventories. August RBOB futures held onto a fractional gain.

The dollar rallied after the Bureau of Economic Analysis reported the U.S. economy bounced back after a slow start to the year, with Gross Domestic Product rising at a 2.3% annualized rate during the second quarter, paving the way for the Federal Reserve to hike interest rates for the first time in nine years.

Commodities markets such as oil and industrial metals have relied on loose monetary policy for liquidity and a rate hike would increase borrowing costs that could reduce the liquidity. Investors are already flowing out of equities and commodities to the safety of the dollar and U.S. Treasuries. A stronger dollar is also bearish for U.S. oil prices.

Earlier, the oil complex rallied after the Energy Information Administration on Wednesday reported draws in weekly domestic crude oil and gasoline stocks, and lower crude production. The EIA reported a 4.2 million bbl domestic crude stock draw, double expectations for a 2.0 million bbl decline.

“The markets trimmed early gains after U.S. Q2 GDP data proved strong enough to support a 0.6% gain in the U.S. dollar index, but too weak to impress equity investors,” said analyst Tim Evans at Citi Futures. “We see the market shifting into a quieter choppy consolidation mode as it works off a short-term oversold condition, at least pending a clear push from fresh fundamental news. On that front, we see first estimates on OPEC crude oil production for the month of July due out over the next few days as one possible focus.”

NYMEX September crude futures settled 27 cents lower at $48.52 bbl after inside trade. ICE September Brent futures eased 7 cents to $53.31 bbl at settlement, reversing off a three-day high of $54.38, with the Brent premium over WTI rising 20 cents to $4.79 bbl.

Products futures were little changed however, with the NYMEX August RBOB contract settling 0.55 cents higher at $1.8279 gallon, off a one-week high at $1.8680. The September RBOB contract rose 1.40 cents to $1.7690 gallon.

The NYMEX August ULSD contract eased 0.01 cents to $1.5982 gallon after posting a double-top at $1.6214. The September ULSD contract rose 0.2 cents to $1.6079 gallon. The August oil products contracts will expire Friday afternoon.

On Wall Street, U.S. equities reversed higher Thursday afternoon after seesawing between gains and losses while the U.S. dollar rose to a one-week high after BEA published its positive reading on Gross Domestic Product while Labor Department data showed weekly jobless claims, a proxy for job layoffs, rose last week after falling a week prior to the lowest level in 41 years. The more accurate four-month average however showed a decline in claims, and total claims still suggest the labor market continues to improve.

The BEA data showed the economy expanded at a 2.3% annualized rate during the second quarter, falling short of an expected 2.5% growth rate but consistent with the Federal Reserve's view that growth picked up during the three months ended in June, driven by consumer spending.

BEA also revised up GDP for the first quarter to 0.6% from the prior reading at negative 0.2%, reflecting an 0.8% swing in the upside revision. Revisions show the economy has been growing at an average annual rate of around 2.0% since 2011 and can withstand a rate hike later this year.

A strong economy would also support domestic demand for oil, but at the same time such data is bearish for oil futures. Analysts said they expect a rate hike in September. The hawkish tone of Wednesday’s Fed statement boosted the dollar that, in turn, exerted pressure on the oil complex.

On supply, EIA reported on Wednesday a 400,000 bbl crude stock draw at the Cushing, Oklahoma, supply hub that serves as the delivery point for NYMEX WTI instead of an expected 300,000 bbl rise in the week-ended July 24. EIA also reported a bigger-than-expected distillate fuel stock build of 2.6 million bbl for the week and lower weekly implied demand for both distillates and gasoline.

Meanwhile, the Organization of Petroleum Exporting Countries said after talks with the Russian energy minister that the oil market will stabilize despite the recent price decline.

“Despite current uncertainties, signs of a more balanced market in 2016 may provide much desired stability to the oil market in the longer-term, a prerequisite for the continuity of timely and adequate investments,” the cartel said in a statement.

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