Oil Futures Drop to Multi-Month Lows

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower again Thursday afternoon, with spot-month contracts posting better than three-month lows to trade in bear-market territory amid concerns over continued accumulation of crude and gasoline supply.

The oil futures complex was choppy most of the session with intermonth spread trading ahead of Friday's expiration of NYMEX August RBOB and ULSD futures contracts and September Brent crude on the IntercontinentalExchange.

NYMEX August RBOB futures settled down 1.52cts at $1.3062 gallon and traded to a $1.3005 fresh five-month low on the spot continuation chart after the close. The backwardation in the first two delivery months widened to a still narrow 0.51cts gallon, with the September RBOB contract settling down 1.61cts to $1.3011.

NYMEX August ULSD futures were settled 2.46cts lower at $1.2704 gallon after trading off a better than three-month spot low of $1.2694. The contango at the front-end of the forward curve widened sharply, with the September ULSD contract settling down 2.37cts at $1.2992 gallon, 2.88cts higher than the August contract. That's the biggest contango this year.

In crude oil trade, NYMEX September West Texas Intermediate futures were 78cts lower at a $41.14 bbl settlement, having traded at a fresh better than three-month low on the spot continuation chart of $41.04.

ICE September Brent settled 77cts lower at $42.70 bbl, off a better than three-month spot low of $42.56 ahead of its expiration on Friday. October Brent was down 68cts at $43.23 bbl at settlement.

After being drawn down for nine weeks straight, total domestic commercial crude oil supply surged 1.7 million bbl during the week-ended July 22 to 521.1 million bbl, 13.4% above the comparable week a year ago, according to Energy Information Administration data released on Wednesday.

Analysts also noted that while seasonal demand for gasoline remains strong, consumption isn't keeping up with the high rate of refinery runs and output of refined products. The EIA data showed gasoline output rose 18,000 bpd to 10.068 million bpd during the week-ended July 22 and gasoline stocks increased 452,000 bbl to 241.5 million bbl for the week reviewed, up 11.8% year-over-year.

Seasonally, gasoline demand eases after peak driving during the summer months, prompting refiners to cut back crude runs and maintain their units. That's likely to lead to a buildup in U.S. crude supplies and further depress oil prices, said analysts.

Global oil demand is also not as strong as expected and the increasing buildup in oil supply is leading some companies to store oil in offshore tankers in what is known as floating storage, said the analysts.

On Wall Street, U.S. equities were mixed this afternoon while the dollar fell to a two-week low versus a basket of six world currencies, with a weaker greenback bullish on oil prices. The yen was stronger versus the dollar ahead of an expected Bank of Japan's stimulus announcement tonight.

The dollar's weakness followed the Federal Open Market Committee decision on Wednesday to leave the federal funds rate unchanged while signaling rate hike could come in September.

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