Oil Futures Tumble

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

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange and August Brent crude on the IntercontinentalExchange moved lower overnight, with West Texas Intermediate sliding to a seven-month low ahead of the July contract's expiration this afternoon.

Building inventory and climbing crude output from a handful of producers that are not part of a 24-country coalition currently executing a nearly 1.8 million-barrel-per-day (bpd) production cut agreement has triggered ongoing long liquidation in oil futures, with a market balance to a globally oversupplied oil market not expected to occur in 2018 by a number of analysts. Over the weekend, Saudi Arabia's energy minister, Khalid al-Falih, was quoted in saying expectations are for the global oil market to rebalance in the fourth quarter.

Saudi Arabia worked with other members of the Organization of the Petroleum Exporting Countries and Russia in first reaching a six-month agreement to cut production in November 2016, with an extension of the production cut through the first quarter 2018 agreed to in late May.

WTI crude futures have plunged $8 per barrel (bbl) since the May 25 agreement, as higher oil prices earlier this year sparked rapid production gains in the United States, up 548,000 bpd this year through June 9, while output in Canada climbs and Nigeria and Libya ramp up production after prolonged constraints on their output due to internal struggles. Nigeria and Libya are members of OPEC, but are exempt from the production agreement.

In his interview, Khalid al-Falih said the higher production from these countries was expected, commented Chicago-based Phil Flynn, senior market analyst with The PRICE Futures Group, with production from Nigeria reported up 11% in May to 1.7 million bpd and 30% higher in Libya to 730,000 bpd. Libya's production is expected to reach 1.0 million bpd by the end of July according to Flynn, citing comments from the director of the Libyan state oil company.

Near 9:00 AM ET, NYMEX July WTI futures were down $1.13 at $43.07 bbl, and near a $42.93 seven-month intraday low on the spot continuous chart ahead the contract's expiration, with the previous low at $42.20 bbl. August WTI futures were down $1.04 at $43.39 bbl in the contango market.

The calendar spreads for WTI futures have widened sharply in June, as nearest delivery loses value against deferred delivered crude oil. The market structure encourages supply to be added to inventory.

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.

In June, total crude and oil products inventory in the United States increased 22.3 million bbl from a five-month low to a 1.353 billion bbl four-month high. Included in the increase is a 5.4 million bbl build in gasoline supply during the two weeks ended June 9 that widened the surplus with the five-year average to an 11-month high.

"The gasoline market is arguably both the most oversupplied and the most oversold segment of the wider petroleum complex," said Tim Evans, Energy Futures Specialist with Citi Futures and OTC Clearing.

NYMEX July RBOB futures were down 2.4 cents at $1.4266 gallon near 9:00 a.m. EDT, holding above last week's multi-month intraday spot low of $1.4101 gallon with a $1.4174 trade. NYMEX July ULSD futures declined 1.93 cents to $1.3918 gallon, sliding to a six-week low on the spot continuation chart of $1.3830 gallon overnight. ICE August Brent crude traded at a seven-month spot intraday low of $45.62 bbl, down $1.29.

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


Brian Milne