Oil Futures Plummet to 6-1/2-Year Low

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled at their lowest level since February 2009 at the height of the financial crisis today after the pace of last week's selloff quickened, with a stronger U.S. dollar and rising supply at home and abroad adding to the bearishness.

The selling pressure was driven by heightened concern that a global glut of oil supply would worsen after the Organization of Petroleum Exporting Countries failed to agree on a plan to cut production at its biannual meeting Friday, Dec. 4, in Vienna.

"The oil market is rendering a clear bearish verdict on the outcome of the OPEC meeting with a drop of more than 4.0%," said Citi Futures analyst Tim Evans. "There are those still inclined to spin OPEC's lack of discipline as an intentional plan designed to capture market share and lead to a stronger market over the intermediate to longer term, but it may be the Iranian oil minister's summation of the policy as 'everyone does whatever they want' that is resonating with traders."

He added, "The ripple effects are including a weaker Russian ruble, a weaker Canadian dollar, and a stronger U.S. dollar that feeds back as another reason to sell crude oil."

NYMEX January West Texas Intermediate tumbled $2.32 or nearly 6% to $37.65 bbl, the lowest settlement since Feb. 18, 2009, after posting a near seven-year low of $37.50. ICE January Brent settled $2.27 lower at $40.73 per barrel (bbl), off a near seven-year low on the spot continuation chart of $40.60, also settling at the lowest level since Feb. 18, 2009.

In products trade, the NYMEX January ULSD futures contract plummeted 6.28 cents, or 5%, to $1.2796 gallon at settlement, and near a near seven-year low on the spot continuation chart at $1.2759.

January RBOB futures dropped 6.08 cents, or 5%, to a $1.2094 gallon settlement—the lowest settlement since Dec. 1, 2008, and near a three-week spot low of $1.2055 gallon.

The OPEC summit ended in disarray Friday and with no plan to ensure price stability through supply and demand rebalancing. Instead, the cartel nearly abandoned any attempts to keep a lid on oil production.

Although OPEC said it would continue to monitor the market and postponed any major decision until its next meeting in June 2016, it implicitly acknowledged its output level would remain at a current level of roughly 31.5 million bpd.

The group is currently producing 1.5 million bpd above its four-year old 30.0 million bpd quota since some members are cheating on their individual quotas.

"Past [OPEC] communiques have at least included statements to strictly adhere or maintain output in line with the production target. This one glaringly did not," said Barclays Capital.

Analysts also noted that the production level by some OPEC members remains uncertain until next year. Iran is expected to boost output by at least 500,000 barrels per day (bpd) and Libyan output fluctuating. Indonesia which produces 900,000 bpd rejoined OPEC in the summer and both Iraq and Saudi Arabia are pumping at record levels to maximize their market share.

A senior OPEC official said "every country has a sovereign right to produce."

Domestically, an analyst projects a 3.0 million bbl stock build for gasoline and a 2.0 million bbl stock build for distillates took place during the week-ended Dec. 4 to be reported this week.

The dollar again rallied today after the Bureau of Labor Statistics on Friday reported U.S. payrolls added 211,000 jobs in November while the unemployment rate remained steady at 5%, paving the way for the Federal Reserve to raise its benchmark federal funds rate at its Dec. 15-16 meeting. On Dec. 2, the dollar spiked to its highest level since April 2003.

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