Bearish Fundamentals Pressure Futures

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled sharply lower Thursday afternoon as slowing demand and rising supply in the United States and in the Middle East joined weak readings for manufacturing.

Domestically, Labor Day marks the unofficial end of the peak driving season, pressuring gasoline demand. Meanwhile, a storm system bearing down on the U.S. East Coast during the holiday weekend is also expected to curtail gasoline demand, said senior analyst Phil Flynn at Price Futures. Flynn said while demand is seen affected by the storm system, more crude supply is set to come online as recently shut-in crude production in the Gulf of Mexico is now restarting, pressing down crude futures.

Tropical Storm Hermine in the eastern Gulf of Mexico has strengthened to hurricane status, and is expected to make landfall on the upper Florida coast by early Friday, according to the National Hurricane Center. Mandatory evacuation is underway in the Florida Panhandle, and storm warning is in effect in Georgia and South Carolina.

The Energy Information Administration's report on Wednesday showed commercial crude oil stockpiles surged 2.3 million bbl during the week-ended Aug. 26 to 525.9 million bbl, 15.5% higher than a year earlier.

Skepticism that the Organization of Petroleum Exporting Countries would agree to rein in output when they meet next month intensified selling pressure for the oil complex. A Reuters' survey showed OPEC oil production increased to 33.5 million bpd in August from 33.46 million bpd in July, with Saudi Arabian output said to have risen as high as 10.90 million bpd last month from July's 10.67 million bpd.

Most analysts don't expect a workable agreement on a production freeze to emanate from informal OPEC talks set for Sept. 26-28 in Algeria. Saudi Energy Minister Khalid al-Falih last week said the Kingdom's oil supply was dictated by customer needs, and analysts pointed to Russia's unwillingness to act to stabilize the market.

Russian Energy Minister Alexander Novak said there was no need for talks to freeze output by OPEC and Russia since crude oil prices have been trading near $50 bbl.

NYMEX October West Texas Intermediate crude futures settled down $1.54 at $43.16 bbl, and slid below $40 to $43.00--the lowest price point for the nearby WTI since Aug. 11. November Brent crude oil futures contract on the IntercontinentalExchange fell $1.44 to $45.45 bbl, moving off a nearly three-week spot low of $45.32.

NYMEX October ULSD futures contract nosedived 4.38cts to $1.3819 gallon at settlement, off a nearly three-week spot low of $1.3767. NYMEX October RBOB futures plummeted 6.10cts to $1.2724 gallon, having traded to a six-month low on the spot continuation chart of $1.2668.

The U.S. dollar eased from Wednesday's three-week high after the Institute for Supply Management showed manufacturing activity fell to 49.4 points in August, down from 52.6 points for July and below an estimated 52 reading. A 50-point reading marks to midpoint between growth and contraction.

Traders now await the release Friday of the August nonfarm payroll report. Consensus estimates are for 180,000 jobs to have been added to the U.S. economy last month.

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

(CZ)