Oil Retreats on Strong Dollar

NEW YORK (DTN) -- New York Mercantile Exchange oil futures tumbled Tuesday morning under pressure from a strengthening U.S. dollar and uncertainty over global demand.

At 8 a.m. CDT, NYMEX October WTI crude futures fell $1.34 to $45.34 barrel after inside trade ahead of contract expiration Tuesday afternoon, with November WTI paper down $1.33 to $45.63 at press time. ICE November Brent eased $1.01 to $47.91 bbl after inside trade.

In products trade, NYMEX October ULSD futures tumbled 2.59 cents to $1.4881 gallon, near a three-week spot low of $1.4802. NYMEX October RBOB futures declined 2.71 cents to $1.3760 gallon after inside trade.

On Wall Street, U.S. equities tracked overseas bourses lower on risk-off trade, with investors concerned about Chinese demand. The dollar rallied to a two-week high versus a basket of six world currencies, including the yen and the euro.

On Monday, oil markets rallied after Baker Hughes said U.S oil drilling eased last week while Wood Mackenzie said $1.5 trillion in planned production projects could be scrapped due to low oil prices.

However, the market's focus Tuesday has shifted back to economic woes and oil demand. Investor sentiment in the global growth is shaky, forcing the U.S. Federal Reserve last week to keep interest rates at record lows of zero to 0.25% despite an improving U.S. economy.

The Fed justified its lack of action on the economic turmoil in China and other emerging markets. Slowing economic growth in China could spill over to the United States and cut demand in the world's two biggest oil consuming nations, analysts said.

At the same time, there's still a glut of supply in the short to medium term, although signs of declining U.S. oil production and supply draws could bring the market into balance in the long term.

The American Petroleum Institute will issue its weekly oil inventory report at 3:30 p.m. CDT while the Energy Information Administration will issue its weekly oil report on Wednesday.

An early survey of analysts shows the market expects a 3.0 million bbl crude stock draw for the week-ended Sept. 18, with gasoline stocks seen down 500,000 bbl and distillate fuel stocks up 2.0 million bbl.

The dollar rallied after comments by Fed officials revived expectations that U.S. interest rates could still be hiked later this year.

In contrast, expectations the European Central Bank and Bank of Japan would expand their respective stimulus programs are driving down the euro and yen while adding strength to the greenback.

Meantime, China's President Xi Jinping said in the Wall Street Journal that his government will continue pursuing economic reforms for the remainder of the year as he begins an official state visit to the U.S. Tuesday.

Oil markets are highly sensitive to macroeconomic news from China and they are keeping a close watch on Beijing's actions.

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