Oil Down on 3-Year High in Supply

NEW YORK (DTN) -- New York Mercantile Exchange oil futures retreated Tuesday morning after the Organization of Petroleum Exporting Countries released its Monthly Oil Market Report for August showing its oil supply rose in July to the highest level in three years.

OPEC said non-gas liquids production is forecast to grow by 190,000 bpd to 6.01 million bpd this year, followed by growth of 170,000 bpd to 6.18 million bpd in 2016. In July, OPEC production increased 101,000 bpd to an average of 31.51 million bpd, the highest since 2012 when the cartel agreed to cap its output at 30.0 million bpd.

“[This] new report is showing that OPEC oil output is at a three-year high as Iran raises its production to the highest levels since 2012. It seems someone is getting ready to sell some oil,” said analyst Phil Flynn at Price Futures in Chicago.

The sharp growth in OPEC production pushed global oil supply sharply higher last month. Citing preliminary data, OPEC said in its report that global oil supply increased 230,000 bpd in July to average 94.9 million bpd.

For all of 2015, the report revised non-OPEC supply growth up 90,000 bpd from expectations last month for annual growth of 960,000 bpd to 57.46 million bpd. On the other hand, the OPEC report revised 2015 global demand growth up 90,000 bpd to 1.38 million bpd, bringing this year's expected world consumption rate to 92.7 million bpd.

At 8 a.m. CDT, the September WTI crude futures contract was down $1.24 or 2.8% at $43.72 bbl while ICE Brent futures tumbled 95 cents or 1.9% to $49.46 bbl.

In products trade, the September ULSD futures contract retreated 2.97 cents to $1.5524 gallon while September RBOB futures contract slid 1.65 cents to $1.6775 gallon.

On Monday, the oil futures complex rallied on a weakened dollar and a refinery outage in Indiana.

Also driving market turmoil, China devalued its currency by 1.9%, the biggest devaluation in two decades, a day after data showed Chinese exports plunged by 8.3% in July, the biggest decline in four months.

China’s surprise move, which is called a one-time off, is meant to boost the country's exports, but it raises the prospect of currency war. Analysts said the Chinese move was depressing oil prices.

On Wall Street, most U.S. stock indexes were more than 1.0% lower while the dollar weakened, reversing overnight gains following China’s currency devaluation. Investors are trying to decipher what China’s move means to the world’s second biggest oil consuming nation and the broader economy.

On domestic oil supply, an early survey shows analysts expect crude stocks to have been drawn down by an average of 2.3 million bbl for the week ended Aug. 7, with gasoline stocks seen down 2.3 million bbl and distillate stocks projected to have increased 500,000 bbl. Despite the projected draw, total U.S. commercial crude oil stocks are still more than 20% above a year ago.

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