Oil Futures Settle Lower on Oversupply

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower Monday afternoon after trading sideways earlier in the session, pulling back amid overbought market conditions and talk of rising crude supplies both domestically and internationally.

"You can make a case that the market is overbought...it's a technical correction...a pause after recent run up," said Tom Bentz, the head of energy derivatives at ABN AMRO Chicago Clearing LLC.

NYMEX June West Texas Intermediate crude futures settled $1.09 lower at $42.64 per barrel (bbl), off a three-day spot low of $42.58. June Brent futures on the IntercontinentalExchange settled 63 cents lower at $44.48 bbl, off a three-day low of $44.26.

In products trade, NYMEX May ULSD futures were down 1.86 cents at $1.2903 gallon, off a $1.2875 three-day low. NYMEX May RBOB futures slid 1.78 cents to a $1.5131 gallon settlement, off a $1.5001 two-day low.

On Wall Street, equities were heading to a lower close while the dollar was down, reversing off Friday's one-week high.

The dollar's weakness comes ahead of policy meetings by the U.S. Federal Reserve on Wednesday and the Bank of Japan on Thursday. The Fed is seen leaving interest rates unchanged while BoJ is expected to announce new stimulus measures. The European Central Bank last week maintained their rates.

For oil traders, the focus remains on supply and demand fundamentals. While U.S. crude production has been falling in recent weeks, supply by members of the Organization of Petroleum Exporting Countries continues to rise after Saudi Arabia on April 17 scuttled a plan to freeze output at January levels.

"While the [oil] markets continue to vacuum up a flow of speculative buying, fresh indications of rising production pose a fundamental threat to the [recent] rally," said analyst Tim Evans, an energy specialist at Citi Futures. "Kuwaiti oil production has rebounded quickly from last week's strike to 3.0 million bpd and a further increase to 3.15 million bpd in June is at least being contemplated."

He added, "There's talk that exports from Iraq may reach a new record in April. Saudi Arabia is boosting capacity at its Shaybah oil field by 250,000 bpd, and while this is presented as simply to maintain spare capacity, it could mean increased overall production in the near term, even if it's just a test."

Domestically, a survey of analysts showed U.S. crude stock build of 2.2 million bbl is expected for the week-ended April 22, while products are expected to have declined by 500,000 bbl for gasoline and 750,000 bbl for distillates.

The American Petroleum Institute will issue its weekly oil data at 4:30 PM ET Tuesday while the Energy Information Administration's weekly oil data is due at 10:30 AM ET Wednesday. EIA said U.S. crude stocks were up 10.1% year-over-year as of the week-ended April 15.

The oil market fell today partly on those bearish supply expectations, although traders remain bullish on medium-term to long-term trend lines for supply.

"More speculators have come to the market as we saw last week, but in truth the market has been range bound, except the range is rising," said Bentz. "WTI's range has moved up from $30 to $35 bbl to $37 to $44 bbl, and as long as the market stays in that range, the better the prospects are for the market to rebalance by the third or fourth quarters. For oil futures, they don't wait for the rebalancing to occur, traders just have to believe. It's psychology."

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