Oil Rallies on Weaker USD

NEW YORK (DTN) -- New York Mercantile Exchange oil futures ended higher ahead of weekly industry oil supply data due later Tuesday, with the rally underpinned by a weaker dollar and a government report showing falling domestic oil production and higher global demand.

The oil complex shook off overnight weakness and reversed up midsession, with spot-month crude oil and ULSD contracts rallying to one-month highs and RBOB traded to a two-week high before paring the gains.

The dollar fell because investors are betting on the Federal Reserve delaying a hike in interest rates until next year, continuing an easy money policy the oil market has come to rely on.

“Last week, the oil market was concerned about fundamentals [but] today the dollar is the main focus,” said Michael Wittner, global head of oil market research at Societe Generale in New York. “The slowing growth in China is a worry, but China’s demand remains healthy.”

NYMEX November WTI crude futures jumped $2.27 or 4.8% at $48.53 barrel, settling at the highest level since Aug. 31. The contract posted a one-month high of $48.74.

The ICE November Brent crude futures contract rallied $2.67 or 5.2% to $51.92 bbl at settlement, off a one-month spot high of $51.99, with Brent closing at a premium of $3.39 bbl to WTI.

In products trade, NYMEX November ULSD futures spiked 6.32 cents or 3.9% to a $1.6115 gallon settlement, off a one-month spot high of $1.6139. NYMEX November RBOB futures climbed 5.09 cents or 3.5% to $1.4362 gallon, off a two-week spot high of $1.4456.

On Wall Street, the stock market was mixed, with Dow Jones Industrial Average higher while S&P 500 and Nasdaq 100 indices were both down this afternoon. The dollar’s weakness followed Friday’s disappointing payroll report and Monday’s data showing a slowdown in U.S. service sector growth.

On fundamentals, the Energy Information Administration issued its October Short-term Energy Outlook Tuesday that raised global oil demand growth rate for 2015 and 2016 from levels published last month due to stronger demand in developed countries.

The new STEO report raises the demand outlook for this year by 170,000 bpd and for next year by 269,000 barrels per day. The report anticipates global oil consumption growing at an average rate of 1.3 million bpd to a 93.787 million bpd total in 2015 followed by a 1.4 million bpd average growth rate to a 95.198 million bpd total in 2016.

The STEO report also said U.S. oil production would continue to decline this year through mid-2016 before recovering later that year. EIA estimates total U.S. crude oil production declined by 120,000 bpd in September compared with August.

Projected U.S. crude oil production averages 9.2 million bpd in 2015 and 8.9 million bpd in 2016. That’s up from 8.7 million bpd for 2014, but 200,000 bpd below the 9.4 million bpd output seen during the first half of this year.

The crude oil production forecast continues to reflect an oil price outlook that will weigh on oil-directed rig counts and drilling and well completion activities throughout the forecast period. Domestic crude oil production started to decrease in the second quarter, beginning with Lower 48 onshore production in April.

Also supporting oil futures were comments from the Organization of Petroleum Exporting Countries. Abdalla Salem el-Badri, OPEC secretary-general, said in London Tuesday that oil prices would rebound as steep cuts in oil investments crimp supply.

El-Badri said OPEC expects global investments in oil and gas projects to be reduced by 22.4% this year. Those remarks come as some OPEC members struggle to maintain market share. Saudi Arabia, Iran and Iraq have cut official oil prices for next month's shipments that raised concerns OPEC is adding more supply into a market with weakening demand.

Fatih Birol, head of the International Energy Agency, said he expects that expenditures will fall by 20% in 2015, the largest drop in history, the Wall Street Journal reported.

Short term, a survey by Schneider Electric showed the market expecting an average crude stock build of 1.5 million bbl for the week ended Oct. 2, with gasoline stocks up 500,000 bbl and distillate stocks down 1.0 million bbl.

Crude stocks at the Cushing, Oklahoma, supply hub that serves as the delivery point for NYMEX West Texas Intermediate is expected to decline by 500,000 bbl.

The American Petroleum Institute will release its weekly oil data at 3:30 p.m. CDT while the EIA's weekly data is due out Wednesday morning.

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