NYMEX WTI Down on Equity Sell-Off

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange settled the first session of 2016 mixed, with the West Texas Intermediate crude contract reversing from a one-month high to end slightly lower on concern over demand sparked by a massive sell-off in equities.

Oil futures rallied early in the session on news Saudi Arabia had cut off diplomatic relations with Iran on Sunday after its embassy in Tehran was set ablaze by protestors after the Saudis executed a well-known Shiite cleric for attempts to incite violence against the Saudi ruling class. Oil markets advanced despite a bulging supply of crude oil on worry tensions between the Saudis and Iran would boil over into open conflict, with the two countries members of the Organization of the Petroleum Exporting Countries. The countries also sit on opposing banks to the Strait of Hormuz, where nearly 17 million bpd of oil traverses according to the Energy Information Administration, which calls the strait the world's most important chokepoint for oil transit.

The market walked back the early session rally in a delayed reaction to weak manufacturing data from China, with the Purchasing Manufacturing Index showing contraction in December for the 10th consecutive month. The data sparked a stock market sell-off on China's exchange that halted trading, with the Shanghai Composite Index tumbling 7%.

U.S. manufacturing also downshifted in December, with the Institute of Supply Management reporting a 0.4 point decline in PMI to 48.2 versus expectations for a gain in the index.

China's stock market tumble Monday sparked a sell-off in U.S. equities, with the Dow Jones Industrial Average down more than 400 points in late afternoon trading.

The sell-off in equities reminded the oil market of their concern over demand, with greater growth in consumption held back by sluggish industrial output from the United States and China -- the world's two largest economies even as gasoline demand has surged. Worries over economic growth which feeds demand for oil pressed oil futures to new multiyear lows in December, with slower-than-expected demand pushing back the date when supply and demand would again find balance.

"The time line towards rebalance remains elusive. Rebalancing in 2016 is more a goal than a probability," said Alan Levine, chairman of Washington, D.C.-based Powerhouse.

NYMEX February WTI crude futures settled down 28cts at $36.76 bbl, reversing from a $38.39 bbl one-month high on the spot continuation chart, with a stronger U.S. dollar exerting additional pressure. The dollar reversed higher in index trading to reach a better-than two-week high, with domestic oil and the greenback having an inverse relationship since oil trades internationally in the dollar.

February Brent crude futures on the Intercontinental Exchange settled down 6cts at $37.22 bbl, reversing from a $38.99 three-week spot high.

NYMEX oil products held to the upside, with expectations for gasoline demand to remain strong amid low retail prices supporting the RBOB contract, with February delivery settling up 1.97cts at $1.2907 gallon. February RBOB futures had rallied to a $1.3379 one-month high on the spot continuation chart before paring the advance.

NYMEX February ULSD futures, which on Thursday (12/31) slumped to a $1.0704 gallon fresh 11-1/2 year low on the spot continuation chart, settled up a marginal 0.25cts at $1.1264 gallon. Nearest delivered ULSD futures rallied to a $1.1827 gallon two-week high before trimming the gain.

Brian L. Milne, 1.609.371.3328, brian.milne@telventdtn.com, www.schneider-electric.com. © 2016 Schneider Electric. All rights reserved.

(BAS)

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