Oil Futures Settle Down

NEW YORK (DTN) -- Spot-month oil futures on the New York Mercantile Exchange settled lower Monday afternoon on a stronger dollar and an outlook for U.S. oil production to increase that overshadowed declines in global output and inventory.

"A firmer dollar prompted some risk-off trade flow across a range of commodities, with the petroleum futures attracting their share of the selling," said analyst Tim Evans at Citi Futures.

The U.S. dollar rallied to a three-week high on expectations for strong U.S. economic growth that would allow the U.S. Federal Reserve to raise the federal funds rate. The dollar often trades inverse to dollar-denominated oil futures.

"The dollar was strong but the market is also pricing in rising U.S. supply," said analyst Phil Flynn.

The most recent weekly report from the Energy Information Administration reported U.S. commercial crude supply at 508.6 million bbl on Feb. 3, 37.9 million bbl or 8.1% above the comparable year-ago period. Flynn expects crude supply increased by another 4.0 million bbl for the week ended Feb. 10.

EIA also reported domestic crude production grew by 63,000 bpd during the week-ended Feb. 3 to a 10-month high of 8.978 million bpd. On Feb. 10, Baker Hughes, Inc. reported an eight-rig increase in the number of active U.S. oil rigs to a total of 591.

In their Monthly Oil Market Report released this morning, the Organization of the Petroleum Exporting Countries also confirmed growing U.S. oil production.

"While [MOMR] included some upward revision to global demand and a solid reduction in OPEC production for January, it balanced that off with a stronger recovery in non-OPEC supply, led by U.S. shale," said Evans.

OPEC revised its outlook for non-OPEC supply growth in 2017 up by 120,000 bpd for annual growth of 240,000 bpd due to a pick-up in oil drilling activity and investment in the United States, especially in the Permian basin.

The ramp-up in non-OPEC output outpaced the revision in OPEC's forecast for 2017 global oil demand, with MOMR adjusting its projection for world oil demand up 35,000 bpd from month prior to 95.81 million bpd for annual growth of 1.19 million bpd.

Based on preliminary data, OPEC indicated world oil supply in January fell 1.29 million bpd month-over-month to average 95.82 million bpd, with the decline due to lower OPEC and non-OPEC oil production.

Citing secondary sources, the report showed OPEC crude production in January decreased by 890,000 bpd month-over-month to a 32.14 million bpd average, which represents 74% of the 1.2 million bpd in production cuts the producer group agreed to on Nov. 30, 2016.

"The OPEC production of 32.14 million bpd for January was still slightly more than what it sees as 32.10 million bpd in 2017 average demand for OPEC crude oil," said Evans. "This is a less supportive view than last week's DOE and IEA assessments and may help to temper overall market sentiment."

The compliance rate compares with recent private surveys that showed OPEC compliance of more than 80% while the International Energy Agency on Friday estimated a 90% compliance rate.

Production cuts by OPEC and 11 non-OPEC producing countries took effect on Jan. 1.

Kuwaiti oil minister Essam al-Marzouq said this morning non-OPEC producers, which agreed to a 558,000 bpd cut on Dec. 10, 2016 in support of the OPEC pledge achieved 50% compliance. In mid-January, al-Marzouq chaired the OPEC committee monitoring production cuts.

At settlement, NYMEX March West Texas Intermediate futures were 93cts lower at $52.93 bbl and ICE April Brent crude oil futures tumbled $1.11 to $55.59 bbl. NYMEX March RBOB futures plummeted 4.50 cents to a $1.5446 per gallon settlement and NYMEX March ULSD futures tumbled 3.86 cents to settle at $1.6273 per gallon.

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