Oil Futures End Down as May Rally Fades

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange settled lower on the day and week while Brent crude on the IntercontinentalExchange ended down while on the spot continuous chart eked out a gain as August rolled into the front-month position on Wednesday in the contango market.

NYMEX July West Texas Intermediate settled down 55 cents at $48.62 per barrel (bbl) while 71 cents lower on the week, trading in a $47.75 to $50.10 bbl range during the holiday-shortened week. ICE spot-month Brent crude futures fell 40 cents to a $49.64 bbl settlement while edging up 32 cents from prior Friday. On Thursday, Brent settled at $50.04 bbl, the first settlement above $50 on the spot continuous chart since early November 2015, while trading between a weekly low of $49.23 and high of $50.33.

NYMEX ULSD futures, with nearest delivery rolling forward from June to July on Wednesday, fell 2.07 cents on the day and 0.59 cent from prior Friday to $1.4881 gallon. The spot-month contract traded at a $1.4662 low this week and at a $1.5298 gallon seven-month high. NYMEX RBOB futures, which rolled forward alongside ULSD, settled down 2.71 cents on the session and 2.44 cents on the week to $1.6075 gallon. On the week, the spot-month contract registered a $1.5761 low and $1.6344 high.

NYMEX oil futures were set for a pullback this week after rallying in May, and the market was not surprised by the rollover of inaction on a coordinated production cut by Organization of the Petroleum Exporting Countries during their biannual meeting Thursday, concluding that the global oil market "is moving through the rebalancing process."

What did catch the market off balance however, was a terrible report on the U.S. jobs market that showed a paltry 38,000 jobs created in May -- 120,000 less than expected, and downward revisions of 59,000 for March and April that dropped the three-month average to 116,000 new jobs monthly. Moreover, the national unemployment rate fell 0.3% to 4.7% in May as people dropped out of the labor force.

The U.S. dollar plunged on the report, sinking to a three-week low, as growing expectations for a rate hike by the Federal Reserve when they meet June 14-15 melted away after only recently gaining traction. The weaker dollar should have propped WTI futures up, and the contract turned positive on the session if only briefly. However, the strength of the U.S. economy came under scrutiny, with economic growth a primary driver in expanding fuel demand.

Another market miss on the service sector added to the weakness in the dollar later in the morning.

The Institute of Supply Management's non-manufacturing index declined 2.8% to 52.9% in May, missing a market forecast for a 0.2% dip to 55.5%. As the service sector slipped last month, ISM reported an unexpected 0.5% gain in manufacturing for the month to 51.3%, the third straight month of expansion.

What was bandied around over the last few months was whether drilling activity in the United States would bounce back with a $50 bbl oil price, with WTI trading above the psychological benchmark twice in late May, if only briefly. Sure enough, Baker Hughes, Inc. reported active rigs drilling for oil in the United States increased nine this week to 325, the first hike in the count since a one-rig increase in mid-March. It also accounted for the hike in the overall U.S. rig count, up four to 408, for the first time since late August 2015.

WTI futures traded at a $48.33 bbl intraday low in reaction to the report.

Still, the Energy Information Administration on Thursday reported the 12th consecutive decline in domestic crude production during the week ended May 27 to its lowest point since September 2014 at 8.735 million bpd. In April 2015, U.S. oil production peaked at 9.7 million bpd.

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

(BAS)

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