Oil Lower on Technical, Supply Pressure

NEW YORK (DTN) -- New York Mercantile Exchange oil futures spiraled lower Friday morning amid profit taking after Thursday’s rally, with the market bracing for more oil supply from Iran once sanctions are lifted as early as this coming weekend.

The increased Iranian oil barrels will add to an oversupplied market while the slowing Chinese economy threatens to undermine demand, though analysts said some of today’s selling is technically driven after both NYMEX West Texas Intermediate and Brent futures on the IntercontinentalExchange broke below the psychological $30 barrel threshold to fresh 12-year lows. The oil selling pressure triggered a rout in equities.

Sentiment is bearish as the market awaits Baker Hughes’ oil rig-count report for the week ended Friday to show the direction of U.S. oil production. The Energy Information Administration’s report Wednesday showed a 10,000 barrel per day increase in domestic crude output to 9.23 million bpd for the week ended Jan. 8. Demand is already soft for heating oil due to mild winter weather, said analysts.

At last look, the NYMEX February WTI crude contract tumbled $1.49 or 4.8% at $29.71 bbl, having pared losses after posting a $29.28 better than 12-year low on the spot continuation chart. ICE February Brent futures fell $1.03 or 3.3% to $29.85 bbl, paring losses after posting 12-year spot low of $29.30.

In products trade, February ULSD futures dipped 1.86 cents or 2% to $0.9622 gallon, off a new nearly 12-year spot low of $0.9458. February RBOB futures eased 2.50 cents or 2.3% to $1.0434 gallon, off a fresh seven-year spot low at $1.0301.

On Wall Street, the Dow Jones industrial Average was down more than 350 points while the S&P 500 Index was down 45 points and Nasdaq 100 was down about 120 Friday morning, with equities tracking plummeting oil prices.

The broader selloff coincided with fresh data released Friday morning showing U.S. industrial production down 0.4% in December and the producer price index fell 0.2% in December.

For oil traders, the key issue is supply. The market has been kept under pressure since the start of 2016 and well prior to this year, pressured by a glut of global oil supply, with Saudi Arabia, Iraq and Russia both producing at record levels. The United States has also been producing over 9.0 million bpd, although current projections show a slight decline. A slowing Chinese economy could also undermine demand.

The latest concern over supply come from expectation Iran would increase its exports after sanctions are lifted as early as this weekend. Iranian Oil Minister Bijan Namdar Zanganeh said Friday that Tehran will boost exports by 500,000 bpd next month and by an additional 500,000 bpd within six months.

The United Nation's nuclear watchdog is set to report today that Iran has complied with the terms of the July 2015 nuclear agreement with world powers, setting the stage for the lifting of sanctions. Analysts said the rift between Iran and Saudi Arabia ensures there won't be a deal between the two Islamic nations to regulate their oil production or among the entire Organization of Petroleum Exporting Countries. Both OPEC members are trying to gain market share by pushing more crude into the world market.

The latest U.S. data showing swelling crude oil stocks at the Cushing supply hub in Oklahoma and soaring refined product inventories added downward pressure on NYMEX oil futures.

EIA said Wednesday crude oil stocks posted a 100,000 bbl increase last week at the Cushing supply hub in Oklahoma to a 64.0 million bbl record high. Gasoline stocks soared 8.4 million bbl while distillate supplies spiked 6.1 million bbl.

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