Oil Futures End Down Tuesday

NEW YORK (DTN) -- New York Mercantile Exchange spot-month oil futures settled lower Tuesday afternoon, reversing off fresh multi-month highs registered early in the session as the U.S. dollar rallied and on doubt production cuts by the Organization of the Petroleum Exporting Countries and 11 non-OPEC producing countries that took effect Sunday, Jan. 1, would succeed in draining excess oil supply from the market.

The U.S. dollar index surged to a 14-year high versus a basket of six major currencies after data showed solid manufacturing growth and construction spending in the United States, with dollar strength a drag on U.S. oil prices.

Early Tuesday, the Institute for Supply Management's manufacturing index rose 1.5 to 54.7 points in December, the highest since December 2014. A separate set of data from the U.S. Commerce Department showed construction spending increased 0.9% in November.

Taken together, these data points suggest the U.S. economic performance remained strong heading into 2017, and follows the Bureau of Economic Analysis' estimate that the U.S. economy grew at the quickest pace in two years in the third quarter 2016, expanding at a 3.5% annualized rate. Expectation for an accelerating growth rate for the U.S. economy prompted the Federal Reserve to hike the federal funds rate for the second time in 10 years in December, with the Fed seen tightening monetary policy at a quicker pace in 2017.

In early session trade, the oil futures complex rallied to 1-1/2 year highs earlier on their spot continuation charts in reaction to the start of 1.758 million barrels per day (bpd) in production cuts by OPEC and non-OPEC producers, which run for a six-month term. The cuts on robust oil demand, namely from the United States, was seen rebalancing the market midyear. This sentiment was bolstered to rally oil futures after Oman and Kuwait were reported to have reduced their output as agreed to on Nov. 30.

However, trader optimism frayed on another report that said Libya would soon boost its production. Libya announced plans to ship 1.9 million bpd of oil this month from newly reopened Sahara oilfield, Bloomberg News reported. Production by the OPEC member nation currently stands at slightly above 600,000 bpd.

"This report saying we'll have more oil production from Libya is one of the reasons the market is down," said senior analyst Phil Flynn at Price Futures. "The market reacted very badly to that report ... they ran to the exit."

Additionally, "OPEC and non-OPEC production cuts may still leave the global petroleum market with a modest supply/demand surplus through the first half of 2017, leaving crude oil vulnerable to a Q1 downward correction," said Tim Evans, an energy specialist at Citi Futures in New York.

Analysts have also noted that U.S. production cut climb with a higher oil price and mitigate the benefit of the production cuts. A report issued today by Barclays said U.S. crude oil production rose by 230,000 bpd month-over-month to 8.8 million bpd in October, the highest level since May 2016, with most of that output increase coming from North Dakota and other tight oil regions.

NYMEX February West Texas Intermediate crude futures settled down $1.39 to $52.33 per barrel (bbl), after reversing off a $55.24 18-month high on the spot continuation chart.

March Brent on the IntercontinentalExchange was down $1.35 to $55.47 bbl at settlement after reversing off a $58.37 18-month spot high.

NYMEX February ULSD futures tumbled 5.15 cents to a $1.6767 gallon settlement after posting a $1.7647 18-month spot high. February RBOB futures settled down 4.91 cents at $1.6218 gallon, reversing off a $1.7095 17-month spot high.

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