Oil Closes Lower Tuesday

NEW YORK (DTN) -- New York Mercantile Exchange spot-month oil futures tumbled to fresh multi-week lows Tuesday afternoon amid a technical selloff triggered by renewed concern about excess global oil supply.

The selloff followed a report by Reuters saying compliance by the Organization of the Petroleum Exporting Countries with their pledged production cuts slackened in April, prompting liquidation of speculative length in NYMEX oil futures.

The move also came ahead of the American Petroleum Institute's weekly report that's expected to show a stock decline for crude and building product inventories in the United States.

"This was rotation selling which was initially from gasoline to crude and then later on crude came off after hitting some sell-stops," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Ill.

Others agreed.

"Part of the selloff is technical but the catalyst for that technical selling is a Reuters' story that said OPEC compliance [with its output cuts] eased in April from 92% to 90%," said analyst Phil Flynn at Price Futures Group in Chicago. "The market took a leg down after that report came out, plus demand for diesel is weak due to bad weather and demand for gasoline is also not strong."

The head of the OPEC, Mohammad Barkindo, said last week the OPEC/non-OPEC compliance rate with their agreement to cut 1.8 million bpd of production rose 4% to 98% in March from February.

The 90% compliance rate reported today by Reuters for April shows a dramatic drop and serves to undermine OPEC credibility since cartel officials have been trying to jawbone oil prices higher in recent days.

OPEC said it would provide the compliance rate for April later this month, but the Reuters report is the earliest glimpse of what to expect. It also comes at a time when the market has priced in the current output cuts and analysts are expecting OPEC and non-OPEC producers to prolong their production cuts through December in an effort to rid the market of excess supply. The current production quota scheme expires in June.

OPEC is set to meet on May 25 to chart a new supply policy for the rest of the year, knowing that they have so far failed to bring down global oil supply to within their five-year average amid increasing crude production in the United States and now Libya.

"The market is so delicately balanced in terms of those holding long and short positions that it doesn't take much to tip the scale and cause a selloff," said analyst Tom Bentz, vice president for energy derivatives at ABN AMRO. "WTI and other spot-month contracts were near old lows, so when WTI took out the stops at $48.20, everything came down with it. Everything on the technical side was broken down."

On domestic supply, a survey shows U.S. crude oil supplies for the week-ended April 28 fell 2.75 million bbl while gasoline fuel stocks are seen to have increased 250,000 bbl and fuel distillate supplies to have added 1.25 million bbl.

NYMEX June WTI crude futures settled $1.18 lower at $47.66 bbl after tumbling to a five-week spot low of $47.35, and took out technical support points at $48.20, $48, and the recent low of $47.58, although the selloff momentum faded ahead of the API data, said Bentz.

IntercontinentalExchange July Brent crude was down $1.06 to $50.46 bbl at settlement, after breaking below support at $51.35 and now targets $49.71.

In products trade, the NYMEX June RBOB futures contract settled down 1.36cts at $1.5136 gallon, off a $1.5075 fresh two-month low of on the spot continuation chart, with NYMEX June ULSD futures contract 1.98cts lower at a $1.4680 gallon settlement, moving off a $1.4618 five-week spot low.

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