NYMEX Oil Futures End Lower

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures with nearest delivery settled Thursday's session lower, although trimmed deep losses to new multiyear lows as oversold market conditions encouraged bargain buying and the U.S. dollar dropped back from a one-month high.

The lower settlement comes alongside the third session of the year in which major U.S. equity indices plunged, with the Dow Jones Industrial Average down more than 300 points late afternoon amid risk-off trade. The catalyst to this week's drubbing in equities has been heightened worry over China's economy that has turned into fear for many investors, with concern over growth in global oil demand kicking out the already shaky leg of support for oil prices amid a growing glut of global oil supply.

NYMEX February West Texas Intermediate crude futures settled down 70cts at $33.27 bbl after trading at a $32.10 bbl 12-year low on the spot continuation chart, with February Brent crude on the IntercontinentalExchange ending down 48cts at $33.75 bbl, moving off a $32.16 12-year spot low.

NYMEX February ULSD futures settled down 1.51cts at $1.0656 gallon, trading earlier in the session at a $1.0454 gallon 11-1/2 year spot low. NYMEX February RBOB futures ended 1.58cts lower at $1.1460 gallon, paring a decline to a $1.1135 gallon seven-year low on the spot continuation chart.

China's devaluation of its currency, the yuan, sparked heavy selling in its exchanges that halted trading for the second time in 2016, with the meltdown triggering the sell-off in U.S. equity indices. The devaluation suggests to some observers that previous efforts by Beijing to stimulate the economy are not working, and that the slowdown in China is worse than some may have believed.

The World Bank in its Global Economic Prospects report released Wednesday cautioned that an accelerated slowdown in large emerging economies "could have global repercussions."

"There is greater divergence in performance among emerging economies. Compared to six months ago, risks have increased, particularly those associated with the possibility of a disorderly slowdown in a major emerging economy," said World Bank Group Vice President and Chief Economist Kaushik Basu.

Nonetheless, the bank forecasts economic growth for China at 6.7% for 2016 down from 6.9% in 2015. It sees world economic growth at 2.9% this year compared with a 2.4% growth rate in 2015.

The weaker dollar also lent support for crude prices, with the greenback pressured following minutes from the Federal Open Market Committee's December meeting released Wednesday that revealed a cautious approach to further increases in the federal funds rate following last month's 0.25% hike from near zero.

The chief driver for this week's selloff in oil futures is extremely bearish fundamentals, with U.S. commercial crude supply holding 99.9 million bbl more crude oil on Jan. 1 than one-year ago, with distillate supply at a nearly four-year high. U.S. crude production remains stubbornly high at 9.219 million bpd in starting the new year, while the Organization of the Petroleum Exporting Countries closed out 2015 with production at a three-year high.

Tim Evans, energy futures specialist with Citi Futures, sees the likelihood of a consolidation phase for oil futures in the near term, but adds the market is "fundamentally fragile." He highlighted the expected return of Iranian crude exports to the world oil market with the lifting of sanctions, with Iran planning an initial ramp-up of 500,000 bpd.

New supply is estimated to outpace demand somewhere between 1.0 and 2.0 million bpd, and more crude on the water from Iran would worsen the imbalance. Strong global oil demand growth is needed to narrow the chasm, with the International Energy Agency in December forecasting a 1.3 million bpd growth rate in world consumption for this year, with 30% of that growth projected to come from China.

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

(BAS)

Brian Milne