Oil Futures Settle Sharply Lower

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled sharply lower Thursday amid profit-taking triggered by a decision by the Organization of the Petroleum Exporting Countries and 11 non-OPEC producers to extend their production cuts of 1.8 million barrels per day (bpd) through March 2018 without deepening the size of the output cuts.

"It was a case of buy the rumor, sell the news," said technical analyst Brian LaRose at ICAP in Jersey City, N.J. "I've been saying for days that OPEC was setting the market up for this selloff. They talked the market higher before this decision, and now that the extension is official, the market is saying this is not bullish news."

Analysts said traders were disappointed by the decision that was already priced into oil market in recent days, which failed to sustain the early week optimism. Investors wanted a surprise announcement with more production cuts beyond the current level of 1.2 million bpd for OPEC and 558,000 bpd for non-OPEC producers.

OPEC officials, including Secretary-General Mohammed Barkindo and Saudi Arabian Energy Minister Khalid al-Falih, ruled out deeper production cuts, saying that nine more months of cuts at the current level is enough to balance supply and demand. Al-Falih said he was not concerned about the "daily knee-jerk market reaction [to their decision] that's not consistent with long-term fundamentals trend."

Market watchers noted the delay in market rebalancing despite nearly 1.8 million bpd in production cuts that took effect Jan. 1 because of rising production from the United States and Libya. For every barrel of oil OPEC and their partners take out of the market through the production cuts, U.S. oil producers add about 0.8 barrel (bbl), according to analyst Kyle Cooper at IAF Advisors in Houston.

U.S. crude oil production at 9.32 million bpd last week was up 553,000 bpd from a year ago. Moreover, the Trump administration plans to sell oil from the Strategic Petroleum Reserve beginning in 2018, with the goal to cut by half the emergency oil reserves over 10 years. The Energy Information Administration said the SPR held 687.7 million bbl of crude oil on May 19.

NYMEX July West Texas Intermediate crude oil futures settled $2.46 or 4.8% lower at $48.90 bbl after reversing off a $52.00 five-week high on the spot continuation chart and falling to a near one-week low of $48.65 bbl. Breaking below the $50 bbl psychological level triggered selling pressure, with nearest delivered WTI futures ending at a one-week low settlement.

From a technical standpoint, while there are no firm support levels for now, several technical indicators -- including 200-day moving average and 50% retracement -- are all pointing lower, said LaRose.

"We have to wait for the next two to three weeks to see if inventories are being drawn down," LaRose added. "If that happens, the market is bullish and we'll head back up, but if not then that's a catalyst for fresh lows."

July Brent crude oil futures on the IntercontinentalExchange declined $2.50 to a $51.46 bbl settlement, having reversed off a $54.67 five-week spot high and traded to a 10-day spot low of $51.03 bbl. This is the lowest settlement for nearest delivered Brent futures since May 12.

NYMEX June ULSD futures plunged 5.54 cents, or 3.5%, to a $1.5509 gallon settlement, reversing off a $1.6269 five-week spot high to later trade at a $1.5466 four-day low. June RBOB futures settled 4.33 cents lower at $1.6093 gallon, off a $1.5973 one-week spot low.

"We are dealing with seasonality... the RBOB [contract] is the one market to look at, and I've been advising people to lighten up on their load since the market is overbought," LaRose said.

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