Oil Futures Plunge to New Lows

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

CRANBURY, N.J. (DTN) -- Supportive weekly data released midmorning Wednesday by the Energy Information Administration inspired buying nearest delivered oil futures in the New York Mercantile Exchange only briefly, before the sell button was hit amid the newly minted bear market to send the contracts to new settlement lows.

A larger-than-expected 2.5 million barrel (bbl) drawdown in U.S. commercial crude oil inventory that lowered supply to a 4-1/2 month low, and a 1.553 million barrel per day (bpd) surge in total oil product supplied to market to a nearly seven-month high at 21.067 million bpd during the week ended June 16 were bullish features that boosted nearest delivered oil futures.

However, total commercial crude and oil product supply in the United States moved down a modest 1.9 million bbl from a four-month high to 1.351 billion bbl that is partly explained by a 335,000 bpd jump in gasoline imports. The period reviewed was only the third week in 2017 which total commercial oil supply held above 1.350 billion bbl, which follows a 12-week period in 2016 from mid-July through the end of September in which inventory has been this high, peaking during the end of August at a 1.374 billion bbl record high.

These data points sum up the impetus behind oil futures move into bear market territory this week, which is defined as a 20% decline from a recent high water mark. The previous bear market ended in August 2016, coinciding with initial news that Saudi Arabia was serious in their efforts to negotiate production cuts by the Organization of the Petroleum Exporting Countries after failed attempts earlier in the year, with an agreement emerging on Nov. 30.

The stubbornness of high oil supply was illustrated earlier in June when the International Energy Agency said commercial oil inventory held by the 35 industrialized nations, which include the United States, increased in April despite four months of production cuts by OPEC and 10 non-OPEC oil producing countries of nearly 1.8 million bpd. A surplus in commercial oil inventory held by the Organization for Economic Cooperation and Development against the five-year average widened to nearly 300 million bbl, and to a higher surplus then when OPEC agreed to their production agreement in November.

Atop of these data points, a Bloomberg index shows floating storage, defined as tankers with oil supply that are not moving, reached a record high.

The contango market structures for West Texas Intermediate crude futures on NYMEX and Brent crude on the IntercontinentalExchange widened sharply in June, although the calendar spreads for WTI narrowed today. On Brent's forward curve, the calendar spreads through December have narrowed somewhat this week while widening sharply thereafter, with July 2018 at a nearly $3 bbl premium to the August contract, which is nearest to delivery.

A widening contango encourages storing oil and buying deferred dated futures contracts which would exacerbate the surplus and further pressure oil prices nearest to delivery and in the spot physical market. OPEC said their goal with the production cuts is to lower global oil inventory to their five-year average, and a widening contango market structure would frustrate those efforts.

NYMEX August WTI futures settled at a more than 10-month low settlement value on the spot continuous chart of $42.53 bbl, down 98 cents, with an intraday low on the session at $42.05 bbl.

ICE August Brent crude futures ended down $1.20 at $44.82 bbl, the lowest spot settlement since mid-November, and near a $44.35 intraday low.

Brent's premium to WTI narrowed to a $2.29 bbl one-week low, with a wider discount for WTI futures deemed essential in beefing up U.S. crude exports. The EIA today reported a 205,000 bpd decline in U.S. crude exports to 517,000 bpd for the week ended June 16, a weekly low for 2017.

NYMEX July RBOB futures ended at a fresh near seven-month spot low settlement at $1.4105 gallon, down 1.35 cents on the session, paring a decline to a $1.3955 intraday low.

NYMEX July ULSD futures swung to a more than 10-month low settlement on the spot continuous chart of $1.3648 gallon, down 3.01 cents, trimming a penny loss off an intraday low of $1.3540 gallon.

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


Brian Milne