Oil Down Despite Demand, Supply Outlook

NEW YORK (DTN) -- New York Mercantile Exchange oil futures reversed lower Monday morning despite a report by the Organization of Petroleum Exporting Countries raising its global oil demand outlook for this year while projecting a quicker decline in U.S. output through next year. The oil complex had been higher in overnight trade.

There was also muted reaction to reports of an attack on an oil flow station in Nigeria that could threaten supply from that West African nation.

The market is expected to continue seesawing on either side of Friday’s settlements in regular trade, with a weaker dollar also expected to support oil prices. The spot-month price band remains narrow.

At 8 a.m. CDT, NYMEX November West Texas Intermediate futures fell 31 cents to $49.32 barrel while the ICE November Brent crude futures contract eased 23 cents to $52.42 bbl after inside trade. NYMEX November ULSD futures edged down 0.83 cents to $1.5826 gallon, while NYMEX November RBOB futures fell 0.24 cents to $1.4143 gallon.

On Wall Street, U.S. stock indices turned mixed, while the dollar index fell to a fresh three-week low. Earlier, eurozone indices closed lower while Asian bourses were higher.

Dollar weakness is linked on expectation the U.S. Federal Reserve would delay raising interest rates until next year. However, some Fed officials over the weekend said the central bank could still cut rates in December, which would be bearish for commodities that have come to rely on easy money policy.

Most of the market’s focus is trained on the tightening supply and demand fundamentals. In its Monthly Oil Market Report for October released Monday morning, OPEC raised its outlook for 2015 world oil demand by 40,000 barrels per day versus last month's estimate projecting demand would grow at a 1.5 million bpd rate to 92.86 million bpd. For 2016, global oil demand would grow at a 1.25 million bpd rate to 94.11 million bpd, reflecting a downward revision of 40,000 bpd, the report said.

On supply, the report projected a quicker decline in U.S. output. Non-OPEC oil supply growth in 2015 was revised down from month prior by 190,000 bpd to a 720,000 bpd growth rate, mainly due to "a downward adjustment in the U.S." For 2016, non-OPEC supply "is expected to show a clear contraction of 13,000 bpd," following a downward revision of 480,000 bpd versus last month's estimate.

Earlier, Kuwait oil minister Ali Saleh al Omair made bullish comments on the supply and demand outlook overnight. Omair said there were signs global oil demand would improve in the first quarter 2016, while falling oil production in the United States would reduce supply.

He said OPEC won't reduce its official production quota of 30 million bpd, but U.S. output has been falling since mid this year and is expected to continue lower, citing the drop in oil shale drilling.

Active U.S. oil rigs fell for the sixth consecutive week last week, down nine to a 605 better-than five-year low, oil services firm Baker Hughes reported. Rigs were down 1,004 year-over-year for the week-ended Oct. 9, signaling a drop in oil output. Rig count is an important gauge of future production.

A number of oil analysts have backed up Omair's bullish outlook, but with caveats.

"Oil prices have bounced over the past week or so and both Brent and West Texas Intermediate crude oil are back above the psychologically important $50 bbl level," said analyst Kevin Norrish at Barclays Capital. "We agree that the downside price risks are receding as supply restructuring gathers pace, but the bottoming out process is likely to last for a while yet."

He added, "If past patterns are any guide there is unlikely to be a sustainable improvement in commodity prices until global GDP starts to improve and there is little sign of that yet."

In addition, recent speculation over possible collaboration between OPEC and non-OPEC members to reduce excess oil supply has injected some optimism into the market, although previous such efforts have been futile.

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