Oil Futures Tumble in Early Trade

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange were trading near multi-week lows early Friday and on the first day of the second quarter following mixed settlements Thursday and after the expirations of the April RBOB and ULSD and ICE May Brent futures contracts.

After stalling in the face of resistance in the low $40s per barrel (bbl) in March, West Texas Intermediate and Brent crude futures are retracing the downside, with a combination of bearish fundamental and technical factors triggering the morning selloff.

Reports this morning that Saudi Arabia would not freeze crude production at January levels as proposed earlier this year by the Saudis and Russia unless Iran also agrees to do so was the latest bearish news this week to quash hope for a coordinated effort by international oil producers to address a global supply glut.

The proposal had floated through the news wires for weeks and helped spark a rally in March, with speculators taking long positions on the viewpoint a production freeze would begin to reverse ongoing supply gains. However, a freeze in production is not a cut, and analysts saw little to no value in the proposal, noting too that Russian production was at an all-time post-Soviet high and Saudi Arabia and Iraq were pumping at or near record highs in January.

Moreover, Iran refused to agree to the arrangement, having won sanctions relief in January, saying it would only agree to such a commitment when its production reached 4.0 million bpd. Tim Evans, futures specialist for Citi Futures, in a note to clients cited a report from Bloomberg News that Iran's crude production increased 100,000 bpd in March to 3.2 million barrels per day (bpd).

Meanwhile, Bloomberg also reported production by the Organization of the Petroleum Exporting Countries increased 69,000 bpd to 33.090 million bpd in March. Earlier in the week, there was news Saudi Arabia and Kuwait would reopen a jointly operated oilfield.

This string of news suggested the global oil market imbalance would endure, with a rebalance not expected until 2017.

It also follows a report released Wednesday by the Energy Information Administration that U.S. crude supply increased to 534.8 million bbl as of March 25, with the previous high inventory level at 535.5 million bbl in 1929.

At 9:00 AM ET, NYMEX May WTI futures were down $1.31 at $37.03 bbl and near a $36.72 two-week spot low. Today's selloff follows a $4.59 or 13.6% surge in March while up $1.30 or 3.4% in the first quarter, with speculative long positions and short covering driving last month's gains.

ICE June Brent crude slid $1.46 to $38.87 bbl and near a $38.55 two-week spot low, which follows a $3.63 or 10.1% advance by the nearest delivered contract in March and $2.32 or 5.9% gain for the first quarter.

Today, WTI's five-day moving average slipped below its 20-day moving average, suggesting a short-term downtrend. Brent's 20-day moving average topped its five-day average earlier in the week.

NYMEX May ULSD futures slumped to a $1.1314 gallon one-month low on the spot continuation chart on its first day as the contract closest to delivery, while down 4.13 cents at $1.1442 gallon. May RBOB futures were down 4.12 cents at $1.4055 gallon, near a $1.3980 two-week spot low.

Nearest delivered RBOB futures spiked 37.68 cents or 35.9% in March and 15.94 cents or 11.2% in the first quarter, while nearest delivered ULSD futures gained 10.88 cents or 10.1% in March and 11.44 cents or 9.7% in value during the first quarter.

The decline by WTI is under further pressure from a stronger dollar, which reversed higher following a bullish jobs report and after weakening to a 5-1/2 month low in index trading on Thursday.

The Labor Department reported 215,000 jobs were created by the U.S. economy in March, more than an expected 195,000 jobs. During the first quarter, the U.S. economy averaged 209,000 new jobs per month.

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

(BAS)

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