Oil Futures Tumble Into Close

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange tumbled Wednesday in response to weekly oil supply data showing large builds in crude oil and product inventories that offered evidence for bears that a persistent global oil supply glut now in its third year would endure beyond previous expectations.

NYMEX West Texas Intermediate and ULSD futures registered their second lowest settlement values on the spot continuous chart of 2017, and RBOB futures its third lowest end-day value of the year, while Brent crude fully retraced the price run-up that began late November 2016 in response to the Organization of the Petroleum Exporting Countries initial six-month production cut agreement.

Oil futures have been under pressure since OPEC's second biannual meeting on May 25 that extended the Nov. 30 six-month agreement for another nine months through the first quarter 2018, with the market underwhelmed by the accord.

OPEC and 10 non-OPEC oil producing countries agreed to rollover production cuts of nearly 1.8 million bpd in late May, although Saudi Arabia and non-OPEC oil producer Russia had telegraphed their intent a week prior, fueling a rally from early May lows. By the time OPEC and its non-OPEC oil producers agreed to a rollover of the production cuts, the market was demanding more, namely a larger cut to contend with climbing new production from the United States and OPEC members Libya and Nigeria that are not parties to the agreement because of internal struggles.

In reaching their agreement, OPEC said the goal was to reduce global oil inventories to their five-year average. Yet, oil inventories held by the 35-country members that make up the Organization for Economic Cooperation and Development have barely budged according to the Energy Information Administration in their Short-Term Energy Outlook released Tuesday, showing OECD commercial oil supply 257 million bbl above the five-year average.

Amid the production cuts, and as oil prices advanced, U.S. crude production ramped higher, grabbing market share, with shale oil producers having lowered their breakeven costs, improved their balance sheets with the assistance of yield-hungry banks, and hedging heavily when crude prices topped $50 bbl.

Since OPEC reached their initial agreement in late November, U.S. crude production has stormed higher, up 621,000 bpd to 9.318 million bpd, a weekly output high last seen in August 2015 EIA data shows. There is a bit of irony that Wednesday's sell-off came even as U.S. crude production dipped 24,000 bpd last week, down for the second week out of the past 16 weeks.

In their weekly report today, EIA said U.S. commercial crude oil supply increased for the first time in the second quarter, up 3.3 million bbl that ran contrary to market expectations for a 3.0 million bbl draw.

EIA also reported a 3.3 million bbl build in gasoline supply that contrasted with expectations for a 500,000 bbl increase, and a 4.4 million bbl increase in distillate fuel supply that was more than an anticipated 1.0 million bbl supply gain, and pushed U.S. stocks to a 151.1 million bbl two-month high.

Implied gasoline demand tumbled 505,000 bpd from an all-time high to a 9.317 million bpd five-week low, although the extreme moves are likely explained by downstream pre-stocking of supply for the Memorial Day weekend and the subsequent excess supply during the following week through June 2.

However, distillates supplied to market also plunged, down 520,000 bpd to 3.505 million bpd -- the lowest weekly implied demand rate since the first week of 2017.

During the week-ended June 2, EIA shows total oil products supplied to market fell 1.418 million bbl to a 19.34 million bpd six-week low, with U.S. commercial crude and oil products stockpiles growing 15.5 million bbl to 1.3465 billion bbl -- the highest total supply level for the United States in three months.

NYMEX July WTI futures settled down $2.47 at $45.72 bbl, nearly retracing the full run-up from November on the spot continuous chart, with support at the May 4 settlement low at $45.52 bbl. ICE August Brent crude futures settled down $2.06 at $48.06 bbl, with the previous low settlement on the spot continuous chart registered Nov. 29, 2016 at $46.38 bbl.

NYMEX July RBOB futures settled down 6.32cts at $1.4913 gallon, with $1.4812 traded May 4 and $1.4875 traded Feb. 7 the only two settlement lows on the spot continuous chart in 2017 that are lower.

NYMEX July ULSD futures settled down 5.0cts at $1.4162 gallon, ending fractionally higher than the $1.4123 gallon settlement low on the spot continuous chart for 2017 registered May 4.

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

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