Oil Futures End Down on Oversupply

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange settled lower for a second straight session Friday, registering steep declines on building global supply that pushes off to a later date when supply and demand would rebalance.

After lending upside price support for several weeks, market opinion that the Organization of the Petroleum Exporting Countries would ratify their Sept. 28 pledge to limit crude production to a 32.5-million to 33.0-million-barrel-per-day (bpd) range evaporated following data released Thursday from the International Energy Agency showing OPEC production in October at a record high of 33.83 million bpd. OPEC, in their Monthly Oil Market Report released this morning, corroborated the IEA data, citing secondary sources that placed output by the 14-member cartel at 33.64 million bpd in October.

Growing production in Russia and the United States, with the U.S. oil rig count up two this week to 452 and 122 higher since June, added to the bearishness over the lopsided supply-demand disposition.

A stronger U.S. dollar, which rallied to a nine-month high today, exerted further pressure upon domestic oil prices, with the greenback and oil having an inverse relationship.

NYMEX December West Texas Intermediate crude futures settled down $1.25 at $43.41 barrels (bbl), and edged 66 cents lower from prior Friday. The WTI contract tested Wednesday's $43.07 bbl spike-low in reaction to the surprise win by Donald Trump to become the 45th president of the United States with a better than seven-week spot low today of $43.03 bbl.

January Brent crude on the IntercontinentalExchange swung to a $1.09 loss at $44.75 and is down 83 cents on the week, trading at a $44.19 13-week low on the spot continuation chart.

NYMEX December ULSD futures dropped back 3.54 cents to a $1.4012 gallon settlement while down 2.91 cents on the week after trading at a $1.2970 gallon seven-week spot low.

NYMEX December RBOB futures have now declined every day since Nov. 2, settling with a 3.24 cents loss at $1.3053 gallon, and erased 7.33 cents or 5.3% of its value this week. On the spot continuation chart, RBOB traded at a $1.2970 gallon nine-week low.

This week's decline by RBOB futures follows the successful restart of Colonial Pipeline's main gasoline line over prior weekend after it was shut Oct. 31 following an explosion and subsequent leak in Alabama.

The path for a coordinated production cut by OPEC continues to narrow, and would require Saudi Arabia to shoulder most of the burden, considering exemptions and special conditions for Nigeria, Libya, Iraq and Iran. Coordination with non-OPEC Russia seems immaterial, with IEA reporting year-on-year growth in Russian oil production at 230,000 bpd this year, and output currently at a record pace that could increase production by another 200,000 bpd in 2017 if sustained.

After five consecutive months of higher OPEC production to October's record high rate, cartel members that have jockeyed for better terms in front of OPEC's Nov. 30 biannual meeting with the agenda to ratify the Algiers' pledge have made an agreement for a meaningful supply cut less likely. Add to the calculus the surprise election of Trump to the U.S. presidency, a candidate that is expected to end many of the restrictions on producing raw materials and building infrastructure, and an OPEC production cut could be made up elsewhere.

"It is ESAI Energy's view that the election of Mr. Trump subtly shifts the balance of power in the oil market," said the Boston-based analysts firm in a post-election memo.

ESAI notes an OPEC production cut would support higher prices, but that would give rise to greater production from shale oil producers in the United States. They argue OPEC's power is its ability to hold prices low.

"This means if a good OPEC deal is unreachable, the Saudis are more likely to walk away under the pretense of taking a "wait and see" attitude regarding the new President, while continuing to keep the pressure on U.S. shale," said ESAI.

Meanwhile, the Energy Information Administration on Wednesday reported a 170,000 bpd jump in U.S. oil production to a five-month high of 8.692 million bpd for the week ended Nov. 4.

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

(CZ)

Brian Milne