CRANBURY, N.J. (DTN) -- Oil futures traded on the New York Mercantile Exchange tumbled to their lowest settlement values on the spot continuous chart in 2017, breaking below support at lows plumbed in May to fully retrace the advance from November that was sparked by an agreement to cut oil production by the Organization of the Petroleum Exporting Countries.
There was little in the way of supportive news for the oil market midweek, with an unexpected weekly build in U.S. gasoline inventory amid another drop in demand during a time of year when consumption should be expanding sparking long liquidation sales in NYMEX oil futures.
Oil futures were already under price pressure ahead of the 10:30 a.m. EDT weekly supply report from the Energy Information Administration, with the International Energy Agency in their monthly outlook reporting higher global oil supply in May, building inventory in developed economies in April, with a forecast that the global oil market might not see balance until the end of the first quarter 2018.
Against that backdrop, and following a steep selloff last week amid bearish supply data, a 2.1 million barrel (bbl) build in U.S. gasoline inventory versus expectations for a 1.0 million bbl draw while gasoline supplied to market fell 48,000 barrels per day (bpd) to a 9.269 million bpd six-week low unleashed heavy selling.
The market shrugged off a 1.7 million bbl draw in U.S. crude inventory reported for last week, although domestic production increased 12,000 bpd to 9.33 million bpd while crude imports remained above year ago and the five-year average despite a 216,000 bpd decline. Distillate fuel supply edged up a less-than-expected 300,000 bbl while demand surged 540,000 bpd to erase the prior week's plunge.
At the close, NYMEX July RBOB futures were down 6.68 cents at $1.4327 gallon, with the previous low settlement on the spot continuous chart plumbed Nov. 29, 2016, at $1.3771 gallon. July ULSD futures erased 3.75 cents in value to settle at $1.4102 gallon, with the previous low settlement on the spot chart registered on Nov. 14 at $1.3855 gallon.
NYMEX July West Texas Intermediate futures settled down $1.73 at $44.73 bbl, with the previous spot low settlement at $43.32 bbl achieved Nov. 14. August Brent crude on the IntercontinentalExchange settled down $1.72 at $47.00 bbl, the lowest close on the spot continuous chart since the Nov. 29 $46.38 bbl settlement.
Both the IEA monthly Oil Market Report and the EIA's Weekly Petroleum Status Report fortified the bearish argument that production cuts of nearly 1.8 million bpd by OPEC and 10 non-OPEC oil producing countries in place since Jan. 1 and to run through March 2018 would be replaced by producers that are not part of the agreement, namely the United States. Moreover, projected strong demand growth has been less robust than previously advertised so far, reflected by weakness in U.S. gasoline demand since Memorial Day.
IEA suggests the slowness in global oil demand growth seen in the first quarter, up 900,000 bpd year-on-year, is transitory. However, IEA did revise lower by 200,000 bpd from month prior its projection for demand to outpace new supply in the second quarter to 500,000 bpd due to demand weakness in China and Europe.
The Paris-based agency also reported an 18.6 million bbl supply build in commercial oil supply held by the 35 countries that are part of the Organization for Economic Cooperation and Development in April that boosted inventory 292 million bbl above the five-year average and to a surplus higher than when OPEC first reached their agreement to cut production.
"Indeed, based on our current outlook for 2017 and 2018, incorporating the scenario that OPEC countries continue to comply with their output agreement, stocks might not fall to the desired level until close to the expiry of the agreement in March 2018," said IEA.
That viewpoint was compounded by IEA's debut forecast for 2018 in which the Paris-based agency sees annual supply growth by non-OPEC oil producers at 1.5 million bpd, led by the United States, which outpaces year-on-year global oil demand growth seen at 1.4 million bpd.
In currency trade, the U.S. dollar clawed back most of its value after trading at a seven-month low following the afternoon announcement by the Federal Open Market Committee that it would hike the federal funds rate 25 basis points to 1.25%. The widely expected move was the second increase in the key overnight borrowing rate this year and the fourth in the current monetary tightening cycle that began in December 2015.
"The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate," read the FOMC statement released Wednesday afternoon.
While the rate hike illustrates confidence for the U.S. economy, a stronger U.S. dollar could pressure domestic crude prices since oil trades internationally in the greenback. Additionally, tightening borrowing rates could diminish trading activity.
Brian L. Milne can be reached at email@example.com
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