Oil Futures Down on Fed Rate Hike

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower Wednesday afternoon, snapping a four-session rally under pressure from a spike in the U.S. dollar and a continued high level of oil supply globally, while the downside found a floor on data from the Energy Information Administration showing stock draws for domestic crude and distillate fuels for the week-ended Dec. 9.

The dollar rallied to a better-than-13-1/2-year high Wednesday afternoon after the Federal Reserve raised its benchmark interest rate 25 basis points and signaled a faster pace of rate hikes in 2017.

"The Fed rate hike will only have indirect impact on oil prices because people are adjusting their positions. The main issue is we still have a lot of oil supply," said Doug Quigley, an analyst at ABM AMRO in New York.

EIA reported a 2.6 million barrel (bbl) drawdown in commercial crude oil supply for last week that was bullish compared to estimates. However, several internal data points were bearish, including a third weekly increase in crude supply at the Cushing, Oklahoma, supply hub, up 1.2 million bbl for the week ended Dec. 9 to 66.5 million bbl.

"The Cushing stock increase was a sign of weakness... implied petroleum demand also fell by about 800,000 barrels per day (bpd)," said Quigley. "People are holding back and we should know that demand often falls before the end of every year."

Others agreed.

"On the bearish side, total petroleum demand fell below 19 million bpd for the first time since January while total U.S. oil production was up almost 99,000 bpd and at 8.796 million bpd is the highest since May," said Kyle Cooper, an analyst at IAF Advisors in Houston.

Quigley also pointed to other bearish factors that underpinned today's retreat for oil futures, including data released this morning by the Organization of the Petroleum Exporting Countries in their Monthly Oil Market Report, which showed global oil supply increased 530,000 bpd from October to 96.84 million bpd in November.

The "OPEC report said the market is not going to rebalance until the second half of 2017 despite the agreed production cuts, which are only going to last for six months anyway," said Quigley.

On Nov. 30, OPEC agreed to cut production by 1.2 million bpd to 32.5 million bpd, which was followed by several non-OPEC oil producers including Russia that agreed on Dec. 10 to reduce output an additional 588,000 bpd beginning on Jan. 1.

OPEC's monthly report also revised up its forecast for non-OPEC oil supply in 2017 by 70,000 bpd for year-on-year growth of 300,000 bpd for an output rate 56.5 million bpd.

On Tuesday, the International Energy Agency said OPEC output totaled 34.2 million bpd in November, 400,000 bpd more than what the cartel pumped in October with global oil production last month at 98.2 million bpd.

At settlement, NYMEX January WTI futures were down $1.94 to $51.04 per bbl while ICE February Brent crude futures fell $1.82 to $53.90 bbl. ULSD futures dropped 3.12 cents to $1.6435 gallon and January RBOB futures posted a 1.76-cent loss to $1.5331 gallon.

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