Oil Futures Pare Overnight Losses

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

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange settled lower on the session Friday and for the week, pressured by persistent concern that climbing U.S. crude production would delay reaching a global supply-demand balance despite production cuts from 24 oil producing nations.

The first week of the third quarter ended with the sixth weekly decline in oil futures out of the past seven weeks, with oil futures sliding to better than one-week intraday lows before trimming losses.

The end-week selloff follows rallies to one-month highs by oil futures earlier in the holiday-truncated week, and despite sizeable weekly drawdowns from U.S. crude and oil products inventories and the highest implied demand weekly rate on record registered during the final week of June.

Instead, the market's glare was on an 88,000 barrel per day (bpd) increase in U.S. crude production for the last week of the second quarter that negated a 100,000 bpd decline during the preceding week. A quick return by oil companies deploying rigs in the U.S. oil patch following prior week's two-rig decline brought the hammer down on West Texas Intermediate futures early afternoon as they were paring greater losses in early trading, although the WTI contract held technical support.

At 1 p.m. ET, oil service company Baker Hughes, Inc. reported a seven rig increase in the U.S. oil rig count for the week ended today that lifted the number of oil rigs deployed in the United States to a 763 27-month high. Year to date, oil companies have placed 238 rigs into service.

The selloff this week was reinforced by reported production gains by the Organization of the Petroleum Exporting Countries in June, with OPEC currently in agreement to cut production by 1.2 million bpd through March 2018, with the supply pact taking effect Jan. 1. However, the production gains were driven by Nigeria and Libya, OPEC members exempt from the production cuts because of internal struggles.

Crude production from Saudi Arabia was also said to have increased in June, although in recent years the kingdom has exported lower volumes during the summer months because of a spike in domestic cooling demand.

The selloff reflects sentiment that it will take an extended period of time to drain a global supply overhang now in its third year, with the market shrugging off expectations for strong demand during the third quarter. In their most recent Short-term Energy Outlook, the Energy Information Administration forecast world oil demand to outpace global production by 430,000 bpd during the third quarter.

EIA will update its monthly outlook Tuesday, July 11, while OPEC will provide the most recent production data for their 14 members in their Monthly Oil Market Report to be released Wednesday, July 12.

Oil futures rallied Thursday in reaction to overall bullish weekly statistics released by the EIA before reversing down overnight.

EIA reported a large 6.3 million barrel bbl drawdown in U.S. commercial crude oil inventory for the last week of June and a 3.7 million bbl decline in gasoline stocks, both above market expectations. EIA also reported a 1.9 million bbl decline in U.S. distillate fuel inventory that ran contrary to estimates for a draw.

Combined, total commercial crude and oil product stocks dropped 13.4 million bbl to a 1.3388 billion bbl five-week low during the final week of June. Moreover, implied demand for all U.S. oil products, which include gasoline, distillate, jet fuel, residual fuel and propane, spiked 2.579 million bpd to an all-time high of 22.225 million bpd in closing out the second quarter.

At settlement, NYMEX August WTI futures were down $1.29 on the session and $1.81 lower on the week at $44.23 bbl. WTI futures held above key support at the $43.76 May low on the spot continuous chart and retracement support at $43.29 with a $43.78 bbl intraday low.

September Brent crude futures on ICE settled down $1.40 Friday, with nearest delivery down $1.21 bbl on the week to $46.71 bbl, with the August contract expiring prior Friday.

NYMEX August RBOB futures tumbled 3.03 cents to a $1.4984 gallon settlement, although the weekly loss on the spot continuous chart is 1.68 cents. The July RBOB and ULSD contracts expired on June 30.

NYMEX August ULSD futures ended the session 3.37 cents lower at $1.4482 gallon, with spot contract value down 2.73 cents on the week.

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

(BAS)

Brian Milne