Oil Settles Lower Monday

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower this afternoon, pressured by concern over excess supply of crude oil and refined oil products globally and economic uncertainties that could reduce demand.

"You can't get bids today because there's no compelling reason to get into the market ahead of the Federal Reserve decision and weekly oil data," said analyst Phil Flynn at Price Futures. "Global demand is weakening and there's concern about oversupply."

He added, "Gasoline seems to be the main topic of conversation among bearish traders. Refineries will soon start shutting down, leading to a backlog in crude supply."

Flynn also cited a Genscape report today showing a 1.1 million bbl increase in crude oil stocks at Cushing, Oklahoma, the delivery point for NYMEX West Texas Intermediate crude, for the week-ended July 22. The report added to the bearish sentiment.

The NYMEX September West Texas Intermediate crude futures contract settled down $1.06 or 2.4% to $43.13 bbl, off a $42.97 three-month low on the spot continuation chart. IntercontinentalExchange September Brent futures fell 97cts or 2.1% to a $44.72 bbl settlement, off a $44.55 fresh 2-1/2 month spot low.

In products trade, the NYMEX August ULSD futures contract tumbled 3.42cts or 2.5% to a $1.3228 gallon settlement, off a fresh 2-1/2 month spot low of $1.3199. The NYMEX August RBOB futures contract dropped 2.79cts or 2.0% to $1.3336 gallon at settlement, off a near five-month spot low of $1.3291.

Earlier, investment bank Morgan Stanley issued a bearish report calling this "a refinery-driven correction" because of high global gasoline stocks while the investment unit of Barclays bank cited an easing demand growth rate.

Morgan Stanley sees WTI prices raging $30 and $50 bbl this year.

Bearish sentiment was underpinned by Friday's drilling report from Baker Hughes showing the number of active oil rigs rose by 14 to 371 during the week-ended July 22, the fourth consecutive weekly increase, a sign that domestic crude production may be rising again.

The Energy Information Administration last week showed crude stocks fell for the ninth straight week during the week-ended July 15, down 2.3 million bbl to 519.5 million bbl, but that total is still high for this time of year at 55.6 million bbl or 12.0% above the comparable year-ago period. Gasoline stocks unexpectedly increased 911,000 bbl to 241.0 million bbl, up 24.7 million bbl or 11.4% year-over-year.

The global outlook is similarly bearish. "Global oil demand in third quarter 2016 is growing at less than one-third the rate it was in Q3 15," according to Barclays Capital.

Barclays said beyond the third quarter India's oil demand growth is set to again accelerate in the fourth quarter while the consumption pace in China is forecast to moderate.

The International Monetary Fund last week cut its 2016 global growth outlook to 3.1% from 3.2% in the wake of Britain's June 23 vote to leave the European Union, but held off on cutting U.S. forecast, saying the domestic economy will continue to grow at a 2.2% rate this year although the growth rate would have been stronger without Brexit. A weaker growth rate would undermine energy demand.

On Wall Street, equities were pulled lower by falling oil prices while the dollar eased after posting a 4-1/2 month high. Analysts said the U.S. currency remains strong relative to rival currencies, and that strength is pressing down oil prices.

This comes ahead of the Federal Open Market Committee meeting on Tuesday and Wednesday (7/26-27) to discuss the health of the economy and the federal funds rate--the key overnight bank borrowing rate that guides rates for mortgages, automobiles and credit cards. Most Fed observers expect the U.S. central bank to raise the federal funds rate in December.

The Bank of Japan will also hold its meeting later this week, with the market anticipating the BoJ will announce some form of economic stimulus. The European Central Bank met last week and decided to keep its interest rates unchanged while saying its 80 billion euro-monthly asset purchase program would continue at least through March 2017.

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