Oil Futures Sink to New Lows

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange traded at new lows en route to lower settlements for a consecutive session amid technical correction, with bullish sentiment tempered by expectation for higher oil production from the United States.

The two-day selloff follows large net-long positions in NYMEX West Texas Intermediate, ULSD and RBOB futures held by noncommercial traders as of the Jan. 3 close of business, a session when the oil contracts traded at 18-month highs. Noncommercial traders provide a guide for market psychology since they are not using a futures contract to hedge an underlying position in the physical market, allowing speculators greater freedom in buying and selling futures.

NYMEX February WTI futures traded at a $50.79 3-1/2 week low on the spot continuous chart, and settled down $1.14 at $50.82 per barrel (bbl) -- the lowest spot settlement since Dec. 7, 2016, when it settled at $49.77 bbl. The contract has retracement support for the November to January rally at $50.26 bbl.

March Brent crude futures on the IntercontinentalExchange traded at a $53.60 bbl 3-1/2 week spot low and settled at $53.64 bbl, down $1.30, with the settlement the lowest on the spot continuous chart since Dec. 7. Brent crude has retracement support at $52.72 bbl.

NYMEX February ULSD futures broke below support at the $1.6153 gallon 38.2% retracement point for the November to January uptrend with a $1.6083 gallon one-month low on the spot continuous chart. The contract settled down 2.62 cents at $1.6114 gallon, with the previous low spot settlement registered Nov. 30 at $1.5709 gallon. ULSD futures have support at $1.5692 gallon, the 50% retracement point for the late fourth quarter uptrend.

NYMEX February RBOB futures settled down 2.4 cents at $1.5467 gallon, a 3-1/2 week spot low settlement, and near a $1.5449 gallon 3-1/2 week intraday low. The contract found support at the $1.5409 gallon 38.2% retracement point, with additional retracement support at $1.4888 gallon.

The second straight down day follows the Energy Information Administration's Short-term Energy Outlook released midday that forecast higher crude production by the United States this year, a risk it sees to rebalancing the global oil market in 2017.

EIA projects U.S. crude production to average 9.0 million bpd this year, up from an estimated 8.9 million barrel per day (bpd) output rate for 2016, and higher than the last week in 2016 when crude production averaged 8.77 million bpd. U.S. crude production increases to 9.3 million bpd in 2018, with the higher output rate in Tuesday's forecast emerging chiefly from offshore production in the Gulf of Mexico.

"Rising tight oil production, which results from increases in drilling activity, rig efficiency, and well-level productivity, also contributes to forecast U.S. production growth," EIA added.

Higher U.S. oil production threatens the goal of production cuts by the Organization of the Petroleum Exporting Countries and 11 non-OPEC producing countries reached Nov. 30 and Dec. 10, respectively, with the agreements to cut 1.758 million bpd during the first half of 2017 "to accelerate rebalancing in the oil market," notes EIA.

"[S]ome countries not subject to the terms of the agreement could increase production in the coming months, which is expected to result in an increase in global oil supplies and could delay consistent global inventory withdrawals until the second half of 2018," said EIA, pointing to uncertainty in output rates by Libya and Nigeria--both OPEC members that are exempt from the Nov. 30 agreement.

The lower close comes ahead of weekly inventory reports from the American Petroleum Institute at 4:30 p.m. EST and the EIA at 10:30 a.m. EST Wednesday.

The market expects across the board supply builds to have occurred during the first week of 2017 calling for a 1.5 million bbl build in domestic commercial crude supply, a 3.0 million bbl increase in distillate fuels inventory, with gasoline stockpiles seen to have increased 2.0 million bbl.

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

(BAS)

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