NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled sharply lower this afternoon, with the spot-month West Texas Intermediate contract settling below the $40-per-barrel (bbl) mark for the first time since August on swelling oil supplies in the United States and a strengthening U.S. dollar.
The Energy Information Administration reported a surprise 10th straight weekly crude oil stock build, adding to a global supply glut, while Federal Reserve Chair Janet Yellen indicated the central bank is ready for a hike in federal funds rate, boosting the dollar to the highest level in more than a decade.
NYMEX January WTI dropped $1.91 to a $39.94 bbl at settlement, near a more than one-week low of $39.84, while ICE January Brent fell $1.95 to $42.49 bbl at settlement, near a three-month spot low of $42.43.
The last time NYMEX WTI settled below $40 bbl was on Aug. 26, so this is a technical breach that would trigger further selling. "This is a very significant event on the downtrend," said analyst Phil Flynn.
In products trade, NYMEX January ULSD futures also nosedived, settling down 6.41 cents to $1.3049 gallon after falling earlier to a 6-1/2 year spot low of $1.3033. NYMEX January RBOB futures slumped 6.99 cents to a $1.2931 gallon settlement, near a one-week spot low of $1.2911.
On Wall Street, U.S. stock indices turned lower while the dollar rallied to the highest level since April 2003 after Federal Reserve Chair Janet Yellen said in a speech at the Washington Economic Club that the Fed is ready to raise rates this month as the U.S. economy is growing at a moderate pace.
She said the job market is expected to continue improving while inflation is expected to head back to a long-term target of 2%. Yellen's speech basically bolstered what most analysts expected, with the odds of a rate hike up to 74%.
Yellen said inflation grew at a 1.25% annualized rate through October and is expected to climb to the range of 1.5% to 1.75% by next year. She said the Fed will look at a slew of data before the scheduled Dec. 16-17 Federal Open Market Committee meeting.
The market now awaits the European Central Bank's meeting tomorrow morning for clues regarding further stimulus while the Bureau of Labor Statistics will issue its November payroll report on Friday.
The case for a rate hike was bolstered this morning by a better-than-expected reading from Automatic Data Processing Inc. ADP's data, which is considered a precursor to the BLS data, showed the private sector added 217,000 jobs in November, the strongest gain in five months and up from an upwardly revised 196,000 increase in October.
The ECB is expected to announce further stimulus measures tomorrow, which is also why the euro fell versus the dollar, with a stronger dollar bearish for domestic oil prices.
Most of the focus was on supply. EIA reported a 1.2 million bbl crude stock build for the week-ended Nov. 27 versus an expected 1.0 million bbl stock draw while API showed a 1.6 million bbl build. The total build includes a 400,000 bbl rise at the key Cushing supply hub in Oklahoma that nearly matches API data but below a projected 1.0 million bbl increase.
On products, EIA reported a smaller-than-expected build of 135,000 bbl for gasoline and a bigger-than-expected 3.1 million bbl build for distillate stocks. The market had expected a gasoline stock build of 300,000 bbl while API reported an 864,000 bbl increase for the fuel. The market also expected a 200,000 bbl rise for distillate stocks while API reported a 2.7 million bbl build for the fuel.
EIA reported higher demand data for crude and gasoline and lower distillates demand.
Overseas, a report from the Middle East said most members of the Organization of Petroleum Exporting Countries have agreed to reduce their production. But Saudi Arabia, the most influential OPEC member, has not agreed to go along, which might doom any efforts to rebalance an oversupplied oil market. OPEC meets Friday in Vienna.
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