Oil Futures End Down Monday

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery traded on the New York Mercantile Exchange settled lower Monday, continuing a short-term downtrend, with RBOB and ULSD futures now settling lower for the fifth consecutive session.

Monday's decline continues the selloff from six-week highs achieved in late May as oil ministers from the Organization of the Petroleum Exporting Countries were convening in Vienna for their biannual meeting on May 25. Underwhelmed by OPEC's decision joined by 10 non-OPEC oil producers to extend a six-month production cut of nearly 1.8 million bpd for another nine months through the first quarter 2018, the market has sold off.

"A 2010 study of market action following a decision to cut output concludes the result is a short price rally. A rollover of an existing agreement, however, had little [bullish] impact on prices," offered Powerhouse, a Washington, D.C.-based brokerage, in a recent note to clients.

The market points to growing U.S. crude production, up 645,000 barrels per day (bpd) since OPEC agreed in late November 2016 to a six-month production agreement to a 21-month high of 9.342 million bpd, and climbing supply from Libya and Nigeria, two OPEC members not part of the agreement because of internal struggles, that will offset the OPEC and non-OPEC production cuts.

OPEC has stated their goal with the production cuts is to lower global oil inventory to its five-year average. In its most recent Monthly Oil Market Report, OPEC indicated commercial oil supply held by the 35 countries that makeup the Organization for Economic Cooperation and Development totaled 3.013 billion bbl in March, 276 million bbl above their five-year average.

"The market continues to ignore the reality of lower supply, and struggles to believe inventories are falling. This is largely due to the limited stock draw in OECD countries," said Boston-based analysts with ESAI Energy LLC.

ESAI said OPEC's extension of production cuts through the first quarter 2018 will help work down the oversupplied market this year.

"In fact, we see a bear trap as the market moves higher this summer," said ESAI.

Still, the Boston analysts said, "Absent a new disruption in supply, however, OPEC will have to extend production restraint through 2018 to fend off lower prices."

NYMEX July RBOB futures tumbled 3.9 cents to a $1.5381 gallon one-month settlement low on the spot continuous chart, and near a $1.5357 intraday low. RBOB futures have retracement support at $1.5250 gallon.

The one-month low by RBOB futures follows record weekly demand for gasoline at 9.822 million bpd during the week leading up to the Memorial Day weekend, according to statistics from the Energy Information Administration. EIA will provide data for last week midmorning Wednesday.

NYMEX July ULSD futures settled down 2.55 cents at $1.4593 gallon, the lowest settlement on the spot continuous chart since May 9, trimming a decline to a $1.4527 intraday low. Scattered support runs down to $1.4343 and is again found at the $1.3748 May low.

NYMEX July West Texas Intermediate futures settled down 26 cents at $47.40 per barrel (bbl), the third straight session with a loss, with the settlement the lowest on the spot continuous chart since May 10. On the intraday chart, WTI futures held above Friday's $46.74 bbl one-month spot low with a $46.86 low. Retracement support is marked at $46.47 bbl.

August Brent crude futures on the IntercontinentalExchange settled down 48 cents at $49.47 bbl -- the second straight settlement below the psychologically significant $50 bbl price point, with the settlement a one-month low on the spot continuous chart. Brent held above Friday's $48.95 bbl intraday one-month spot low with a $49.04 low today. Support is found at $48.54 bbl ahead of the $46.64 May low.

Oil futures rallied briefly overnight on news Saudi Arabia, Egypt, Bahrain and the United Arab Emirates cutoff diplomatic ties with Qatar for its alleged support of terrorism with a goal of destabilizing the region. The immediate reaction was to buy oil futures on concern over the potential for an oil supply disruption in the Middle East. The price advance was short-lived.

"Qatar's backing of Iran on many issues is causing strain in relations between OPEC members. For energy, the way this plays out, can have large impact on prices, said Chicago-based Senior Market Analyst Phil Flynn with the PRICE Futures Group. "As the news broke, oil rallied but sold off after it realized that there is not an imminent threat to supply of shipments."

Qatar is a major gas producer and a minor oil producer.

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

(BAS)

Brian Milne