Oil Futures Lower on Supply Build

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled sharply lower this afternoon after unexpected weekly oil stock builds and bearish comments from Saudi Arabia added to concerns about a glut in global oil supply.

Saudi Arabia's oil minister Ali Naimi said the kingdom had the capacity to boost production to meet any demand increase. Saudi Arabia already produces more than 10 million barrels per day (bpd) and has pursued a strategy of maximizing its market share even as the market has been pressured by excess supply.

The kingdom was a key player in the Dec. 4 decision by the Organization of Petroleum Exporting Countries to lift production quotas, with the cartel having pumped 31.4 million bpd in November.

However, the weekly oil inventory report issued midmorning by the Energy Information Administration was the most consequential to the oil market today as it showed supply builds for domestic crude oil and refined products last week.

NYMEX February WTI crude contract dropped $1.27, or 3.4%, to settle at $36.60 per barrel (bbl), paring losses after posting a one-week spot low of $36.40 bbl. The ICE February Brent futures contract fell $1.33, or 3.1%, to a $36.46 bbl settlement after posting a one-week low at $36.35.

WTI crude futures are on course to close the year down 31% and Brent down 36%. The WTI premium over Brent widened 6 cents to 14 cents at the market close.

In products trade, NYMEX January ULSD futures plummeted by 5.04 cents, or 4.4%, to $1.10791 gallon at settlement, while January RBOB futures fell 4.60 cents, or 3.6%, to $1.2300 gallon, off a two-day spot low of $1.2225.

On Wall Street, equities reversed lower while the dollar surged to a one-week high versus a basket of six major foreign currencies, with a stronger dollar bearish for greenback denominated oil grades.

EIA said commercial crude stocks increased by 2.63 million bbl during the week-ended Dec. 25, slightly below the American Petroleum Institute's 2.9 million bbl crude stock build but missing analyst expectations for a 2 million bbl drawdown.

Crude inventories are more than 26% above year prior and remain near levels not seen for this time of year in at least the last 80 years. The rise in domestic crude stocks was accompanied by a 7% surge for imports while U.S. production was up for the third week in a row, rising last week by 20,000 bpd to 9.2 million bpd.

At Cushing supply hub in Oklahoma, crude stocks were up 900,000 bbl to 63 million bbl last week, equaling API's data. Those surveyed by Schneider Electric called for a 500,000 bbl stock draw at the key hub that acts as delivery point for NYMEX West Texas Intermediate.

EIA also reported gasoline stockpiles increased 925,008 bbl for the week, which is above API's 534,000 bbl build while the market expected supplies to hold steady. EIA reported a 1.8 million stock build for distillates, falling short of API's 2.08 million bbl build while the market expected supplies to hold steady at the prior week's level.

The EIA data further shows demand for distillates fell last week while gasoline demand rose.

Concerns over a glut of supply have had the market on edge for some time now and the oil futures complex has seesawed during this truncated post-Christmas trade week, though volume is substantially down. The consensus among analysts is global oil demand growth will lag supply growth in 2016.

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