NYMEX WTI Crude Futures Down 10.5%

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange ended Friday's session down and registered steep losses during the first week of 2016, plumbing new multiyear lows as turmoil in China's equity market and yuan devaluation shook investor confidence and oil supply continued to build.

NYMEX February West Texas Intermediate crude futures settled down 11cts at $33.16 bbl while down $3.88 or 10.5% from the final day of 2015. On Thursday, WTI traded at a $32.10 bbl 12-year low. February Brent crude futures traded on the IntercontinentalExchange settled down 20cts at $33.55 bbl and erased $3.73 or 10.0% of its value so far in 2016, posting a 12-year spot low of $32.16 on Thursday.

NYMEX February ULSD futures settled down 1.35cts at $1.0521 gallon after trading at a $1.0347 gallon fresh 11-1/2 year low on the spot continuation chart, with the nearby delivered contract down 4.86cts or 4.4% from Dec. 31, 2015.

NYMEX February RBOB futures settled down 1.83cts at $1.1277 gallon, edging off a fresh $1.1125 gallon seven-year low on the spot continuation chart, with the nearby contract down a steep 13.94cts or 11.0% so far in 2016.

It was a dramatic start to 2016, including heightened geopolitical risk after Saudi Arabia cut diplomatic relations with Iran that briefly rallied the oil market on Monday. Analysts doubt the war of words between the two members of the Organization of the Petroleum Exporting Countries would escalate into open conflict, instead speculating heightened competition for customers of their oil with no agreement on production cuts from OPEC anticipated. Earlier this week, the Saudis lowered the asking price for its oil to customers in Europe.

The chief driver of this week's massive sell-off was worry over global economic growth after China's stock exchange was shut down twice after heavy selling triggered an automatic halt to trading, while Beijing's yuan devaluation sent investors scurrying, fearing the slowdown in China's economy is deeper than previously thought.

Highlighting that worry, on Wednesday the World Bank warned of potential economic headwinds caused by an accelerated slowdown in large emerging economies, while downgrading its world economic growth forecast for 2016 to 2.9% from 3.3% projected in its outlook in June 2015.

An economic slowdown means less demand for oil, with many in the market ending 2015 with a belief that low fuel prices would drive sharp gains in consumption this year. The China turmoil quashed that theory for many market observers, with China forecast to drive 30% of global oil demand growth in 2016, the International Energy Agency forecasted in December.

Fundamental factors looked gloomier midweek after the Energy Information Administration reported massive builds in oil product inventories and the sixth consecutive stock gain at the closely watched Cushing supply hub in Oklahoma, the delivery location for the NYMEX WTI futures contract. Supply at Cushing now sits at a 63.9 million bbl record high, with 88% of working tank capacity now occupied.

Oversold oil futures appeared ready to consolidate late in the week, trading higher early in Friday's session, but reversed down on a strengthening U.S. dollar after the Labor Department reported sharp jobs growth in December, and revised higher job gains for October and November. The Bureau of Labor Statistics Friday morning reported job growth of 292,000 in December, and revised higher job gains in October and November by 50,000, with job growth in the fourth quarter 2015 at 851,000. The national unemployment report was unchanged at 5.0%, a better than seven-year low.

NYMEX February WTI futures briefly turned positive early afternoon, up 7cts, after oil service provider Baker Hughes, Inc. reported a 20 rig decline in rigs searching for oil to 516 this week while down 905 rigs from the comparable year-ago period. That's the fewest number of rigs seeking oil in the United States since April 2010.

While the decline in rigs supports a higher crude price, U.S. crude production remains strong, last reported by the EIA at 9.2 million bpd. Moreover, Iran is expected to add as much as 500,000 bpd of crude to global markets with the lifting of sanctions on its exports.

On Thursday, U.S. Secretary of State John Kerry said implementation of the July 2015 nuclear agreement with Iran may be only days away, suggesting sanctions could be lifted as soon as January, paving the way for a sharp increase in crude exports from the OPEC member.

Iranian crude exports would add to the world's supply glut, with estimates suggesting new supply is currently outpacing demand by 1.0 to 2.0 million bpd.

Brian L. Milne can be reached at brian.milne@telventdtn.com

(BAS)

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