Oil Futures End Near Day's Lows

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

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange settled near session lows, dropping back from two-week highs inspired by an agreement between Saudi Arabia and Russia over the weekend to freeze oil production at their January output rate.

The agreement between the world's two largest oil producers, with the United States the third largest, came on the heels of a sharp rally on Friday (2/12) by oil futures on hope Venezuela would be successful in its efforts to prompt a coordinated production cut by the Organization of the Petroleum Exporting Countries and Russia. After failing to reach agreement on a cut, Venezuela floated the prospect of a production freeze.

The Saudis and Russia agreed to the production freeze provided other producers would also abide by the measure, with Venezuela and Qatar quickly indicating they would comply. However, the market poked holes through the deal, firstly noting a freeze is not a production cut, with analysts suggesting global oil supply is outpacing demand by 2.0 million bpd.

Moreover, analysts doubt Iran would agree to freeze production at January levels while they're ramping up output following the lifting of sanctions on their crude exports. News over the weekend indicated Iran had exported its first cargo of crude to Europe in three years, and that its production increased by 400,000 bpd against a goal of a 500,000 bpd hike.

Doubts also surround financially struggling Iraq's likelihood to agree to a freeze in production, with Iraq output near record highs and still trending higher. The International Energy Agency reported Iraq production in January at 4.35 million bpd, 2.99 million bpd for Iran, 10.21 million bpd for Saudi Arabia, and 11.22 million bpd for Russia -- a post-Soviet high.

NYMEX March West Texas Intermediate crude futures settled unchanged at $29.04 bbl, erasing an advance to a $31.53 bbl two-week high while ICE April Brent crude ended $1.21 lower at $32.18 bbl, reversing down from a $35.55 bbl two-week high.

NYMEX March ULSD futures settled down 4.23cts at $1.0270 gallon after trading at a two-week high of $1.1145 gallon early in the session. NYMEX March RBOB futures settled 7.23cts lower at $0.9709 gallon, down from a $1.0844 gallon two-week high.

The flat to lower settlements came despite sharply higher U.S. equity indices in late afternoon trade, with the Dow Jones Industrial Average up more than 200 points and S&P 500 Index advancing more than 1.5%.

The U.S. dollar, which has an inverse relationship with domestic crude oil prices, advanced to a one-week high, continuing its rally from a better-than 3-1/2 month low on Thursday (2/11). The dollar was lent support by comments from European Central Bank President Mario Draghi on Monday that the central bank would expand stimulus efforts in March should the rate of inflation fail to grow.

The world economy remains on shaky ground including in the United States, where the economy expanded at a paltry 0.7% annualized rate during the fourth quarter 2015. Manufacturing which accounts for roughly 12% of the U.S. economy contracted for four months straight through January and for the seventh consecutive month in February in the New York region according to the latest Empire State manufacturing index released today.

Home builders were also less confident in February, with the National Association of Home Builders/Wells Fargo Housing Market Index slipping to 58 from an upwardly revised 61 in January. Readings above 50 show confidence.

"Builders are reflecting consumers' concerns about recent negative economic trends," said NAHB Chief Economist David Crowe. "However, the fundamentals are in place for continued growth of the housing market."

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

(CZ)

Brian Milne