Oil Futures Crater

CRANBURY, N.J. (DTN) -- Oil futures closest to delivery traded on the New York Mercantile Exchange settled at fresh lows Tuesday, with July West Texas Intermediate expiring at a nine-month low on the spot continuous chart while oil products settled at seven-month spot lows.

On the IntercontinentalExchange, August Brent crude futures settled at a seven-month spot low, with oil futures full retracing the uptrend incited by an agreement in November 2016 reached by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries cutting production.

Oil futures were down most of the day, led by WTI and Brent which both plumbed new multi-month intraday lows too, as the lower for longer mantra rings loudly.

Despite being in the six month of production cuts of nearly 1.8 million barrels per day (bpd) scheduled to now run 15 months, global oil inventory levels are increasing amid production gains in the United States, Canada, Libya and Nigeria. In addition, gasoline demand in the United States has been less than anticipated despite the onset of summer driving when consumption rates peak, with gasoline supplied to market declining in the two weeks since the Memorial Day weekend.

At 9.33 million bpd during the week ended June 9, Energy Information Administration data shows U.S. crude oil production is up 548,000 bpd since the end of 2016 to a 22-month high, with oil drillers continuing to deploy rigs in the field, now at 22 consecutive weeks and counting.

A steady backlog of drilled yet uncompleted wells joined by hedges entered into when oil prices were above $50 per barrel (bbl) have sustained the flow of new crude output in the United States. Several reports out this week note, however, that oil producers are no longer hedging in the low price environment.

The supply glut registered on several data sets over the past couple of weeks, with the EIA reporting total commercial crude and oil products supply in the United States increased 22.3 million bbl during the two weeks ended June 9 to a 1.353 billion bbl four-month high. In those two weeks, a 43.05 million bbl drawdown in total U.S. commercial oil supply this year up to the Memorial Day weekend was more than halved.

Earlier this month, the International Energy Agency reported a similar phenomenon, pointing to an 18.6 million bbl increase in the commercial oil inventory of the 35 industrialized countries that are part of the Organization for Economic Cooperation and Development in April that pushed a surplus against the five-year average to 292 million bbl, which is more than when OPEC reached its November agreement in Vienna.

In releasing its report, IEA said OPEC's goal of lowering global oil inventory to its five-year average might not be realized until March 2018 when production cuts by the OPEC, non-OPEC coalition are scheduled to end.

This week, a Bloomberg index shows floating storage is increasing, with oil supply on tankers not in transit up 5% from a year ago to a record high 272.6 million bbl.

The building supply coincides with a deepening contango for WTI and Brent futures, which encourages storing supply and buying deferred futures contracts to lock in profits.

Over the weekend, Saudi Arabian energy minister Khalid al-Falih remained steadfast, reiterating in an interview that the oil market would rebalance in the fourth quarter, and that rising production from U.S. shale oil producers and Libya and Nigeria were factored into the calculation.

Libya and Nigeria are OPEC members but are exempts from the production agreement. Internal struggles within the two African nations have constrained their output over the past couple of years and greatly harmed their economies.

Oil production is increasing in both countries, with output in Nigeria up 174,200 bpd in May to 1.68 million bpd while production in Libya increased 178,200 bpd to 730,000 bpd, according to the most recent Monthly Oil Market Report from OPEC. Libya's output is now reported at roughly 900,000 bpd and forecast to top 1.0 million bpd by the end of July. In 2016, Nigerian production averaged 1.557 million bpd and Libya's 390,000 bpd.

At expiration, July WTI futures were down 97 cents at $43.23 bbl, the lowest settlement on the spot continuous chart since mid-September 2016, with a $42.75 bbl intraday low the lowest on the spot chart in seven months. August WTI futures settled down 92 cents at $43.51 bbl.

ICE August Brent futures settled down 89 cents at $46.02 bbl, with the previous spot low settlement plumbed in mid-November at $44.43 bbl.

NYMEX July RBOB futures tested last week's $1.4101 seven-month intraday low on the spot continuous chart with a $1.4165 gallon trade before settling down 2.66 cents at a seven-month spot low settlement of $1.4240 gallon.

NYMEX July ULSD futures settled down 1.62 cents at $1.3949 gallon, the lowest settlement on the spot chart since mid-November's $1.3855 settlement, while trading at a seven-week spot intraday low of $1.3824 gallon.

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

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