Oil Retreats in Early Trade

NEW YORK (DTN) -- New York Mercantile Exchange oil futures retreated at the start of regular trade Friday morning as traders booked profits from a recent rally generated by oil production outages in Canada and elsewhere.

The downturn was exacerbated by a report showing rising production by the Organization of Petroleum Exporting Countries and a stronger dollar, with the greenback surging after new U.S. economic data showed retail sales rose by the most in a year.

The oil market now awaits the release of Baker Hughes, Inc.'s weekly U.S. rig count report due out at 1:00 PM ET that's expected to show another decline in the number of rigs drilling for oil for the week-ended today.

At 9:00 AM ET, NYMEX June West Texas Intermediate crude futures fell 68cts to $46.02 bbl, reversing from Thursday's 6-1/2 month spot high of $47.02. July Brent futures on the IntercontinentalExchange were 70cts higher at $47.38 bbl.

In products trade, NYMEX June ULSD futures eased 1.54cts to $1.3786 gallon while NYMEX June RBOB futures fell 2.38cts to $1.5595 gallon.

On Wall Street, major U.S. equity indices were mixed while the dollar rose 0.5%, with a stronger dollar bearish for the oil complex. In addition to strong retail sales, the dollar strengthened on expectations the U.S. Federal Reserve could raise benchmark interest rates sooner than recently projected by the market after several comments by policymakers that the U.S. economy remains resilient despite recent soft data, adding that current talk of an impending U.S. recession was misguided.

New York Fed President Bill Dudley's comments were supported Thursday by the heads of Boston and Kansas City Feds who argued in separate events that the central bank risks stoking an asset bubble by delaying raising rates. U.S. Treasury Secretary Jack Lew also this morning said fundamentals of the U.S. economy are relatively strong despite headwinds from overseas.

The central bank meets next June 14-15 to discuss the economy and interest rates.

This morning, fresh data showed April retails prices up 1.3% in April, the biggest gain since March 2015, as consumers resume their spending, and after retail sales fell 0.3% in March. The data eased concern over U.S. economy after growth slowed in the first quarter.

Economy aside, oil traders are focused on oil supply and demand fundamentals, with the market concerned about rising output by OPEC.

In its Monthly Oil Market Report released this morning, the 13-member producer group kept its global outlook for demand growth at 1.2 million bpd in 2016 and tweaked non-OPEC production to decline by 740,000 bpd this year.

The MOMR for May, citing secondary sources, also showed production by the cartel increased 188,200 bpd from March to April with output at a 32.44 million bpd multiyear high. Five OPEC countries raised their production in April with Iran output expanding the most, up 198,200 bpd to 3.451 million bpd and to the highest production rate since January 2012.

Crude production in Iraq also rose in April, up 154,000 bpd to a three-month high of 4.354 million bpd. Iraq production reached a multiyear high of 4.419 million bpd in January.

The oil futures complex's losses were curbed however by an improved demand outlook and the recent outage of 1.0 million bpd of Canadian oil sands output due to wildfires coupled with a 400,000 bpd Nigerian supply disruption.

The affected oil companies in Canada's Alberta oil sands Thursday said they were restarting operations, although it would take more time for all of the disrupted supply to come back on line. The disrupted Nigerian supply remains offline following recent attacks on a Chevron platform and pipeline.

On Thursday, the International Energy Agency suggested stronger global oil demand has substantially reduced the global market supply surplus and expects supply and demand to come to a closer balance later this year.

However, in the same report IEA projected a 250,000 bpd production increase primarily driven by OPEC that would somewhat offset an 800,000 bpd decline in non-OPEC output.

On Wednesday, the U.S. Energy Information Administration reported stock draws for U.S. crude and products for the week-ended May 6 as demand rose. Earlier this week in its Short-term Energy Outlook, EIA revised up its estimate for global demand by 300,000 bpd for 2016 and by 200,000 bpd for 2017.

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