Oil Futures Sink on US Crude Supply

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange sold off sharply Wednesday following weekly data showing growing U.S. crude supply and on the heels of Tuesday's outlook by the Energy Information Administration that domestic crude production this year and in 2018 would climb more than expected a month ago.

Midmorning, the EIA reported an 8.2 million barrel (bbl) build in commercial crude supply for the week-ended March 3 to a fresh record high of 528.4 million bbl, and 37.6 million bbl, or 7.7%, above the comparable year-ago period. The inventory build coincided with a 56,000 barre per day (bpd) expansion in domestic crude production to a more than one-year high at 9.088 million bbl.

U.S. crude production has surged 391,000 bpd since the Organization of the Petroleum Exporting Countries agreed on Nov. 30, 2016 to cut production by 1.2 million bpd, and by 643,000 bpd since early August 2016 when Saudi Arabia broached the idea of production cuts by OPEC that led to the current quota and after failed efforts earlier in the year. Joined by Russia and 10 non-OPEC producing countries on Dec. 10, 2016, the 24 countries agreed to a total reduction in crude production of 1.758 million bpd.

Nearest delivered West Texas Intermediate futures on NYMEX have held above $50 bbl since Nov. 30, 2016, allowing trimmed down oil producers to reactivate idle rigs in the oil patch, adding 84 so far this year to a 609 17-month high as of March 3, according to oil services provider Baker Hughes, Inc.

In their latest Short-term Energy Outlook released Tuesday, EIA revised their U.S. crude production forecast 200,000 bpd higher for this year and next, projecting domestic output to average 9.2 million bpd in 2017 and 9.7 million bpd in 2018. In 2016, EIA estimates U.S. crude production averaged 8.9 million bpd.

NYMEX April WTI futures traded at a $50.05 bbl nearly three-month spot low, and dropped $2.86 to settle at $50.28 bbl, the lowest settlement on the spot continuous chart since Dec. 7, 2016. The session's $2.87 bbl trade range was the widest since the first day of trading in 2017 when trading spanned a $3.13 bbl range, a session when nearest delivered WTI futures spiked to a $55.24 bbl 18-month high.

Noncommercial traders had built a record high net-long position of 556,607 contracts as of Feb. 21, paring the long stance by 31,353 contracts through Feb. 28, the most recent Commitment of Traders report published by the Commodity Futures Trading Commission shows, exposing the market to a steep selloff amid long liquidation sales. A break below $50 bbl could press the contract down to retracement support for the uptrend to the January high at $48.72 bbl.

May Brent crude futures on the IntercontinentalExchange tumbled $2.81 to a $53.11 bbl settlement, also a three-month low settlement on the spot continuous chart, with a session low at $52.93 bbl.

NYMEX April ULSD futures erased 5.72 cents of value on the session with a $1.5567 gallon settlement, the lowest closing value for ULSD on the spot continuous chart since Nov. 29 when it settled at $1.4627 gallon. April ULSD futures traded at a $1.5502 better than three-month low on the spot continuous chart.

NYMEX April RBOB futures rallied to a $1.7072 gallon one-week high, holding below the March 1 $1.7257 18-month high on the spot continuous chart, in early trading before the contract was tugged lower by the WTI selloff, settling down 2.72 cents at $1.6526 gallon.

EIA reported a 6.6 million bbl drawdown in gasoline supply during the week-ended March 3 to a 249.3 million bbl seven-week low. It was the third straight weekly decline in gasoline stocks after reaching a record high at 259.063 million bbl.

Implied gasoline demand spiked 582,000 bpd to 9.268 million bpd, the highest weekly demand rate since the week leading to Christmas. Preliminary data shows gasoline demand still trails the year ago rate, with the cumulative daily average at 8.544 million bpd so far in 2017 down 489,000 bpd or 5.4% against the comparable year-ago period.

Another headwind for WTI prices is a stronger U.S. dollar, with domestic crude having an inverse relationship with the greenback since oil trades internationally in U.S. dollar denominations.

Today, the U.S. dollar strengthened to near last week's seven-week high, as the likelihood that the Federal Open Market Committee would decide to hike the federal funds rate was boosted after ADP Investor Services this morning reported a sharp increase in private sector jobs in February, up 298,000. The Department of Labor will issue its non-farm employment report for February Friday morning, while the FOMC meets March 14-15.

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

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