Oil Settles Lower on Technical Pressure

NEW YORK (DTN) -- New York Mercantile Exchange spot-month oil futures settled lower this afternoon after reversing early gains amid technical pressure that spurred profit-taking, with sentiment also turning sour on renewed concern over rising crude oil production in the United States and globally.

"This selloff was technically-driven after the West Texas Intermediate crude contract tried but failed to get above $50 bbl," said analyst Kyle Cooper at IAF Advisors. "Yesterday's EIA data also showed total petroleum inventories and crude oil production up, which reinforces the bearish aspects of the market."

According to the Energy Information Administration, total commercial petroleum inventories rose 1.1 million bbl during the week-ended July 28, while total products supplied over the last four-week period averaged about 20.8 million bpd, down 699,000 bpd from week prior. Domestic crude oil production rose 20,000 bpd last week to a 9.43 million bpd fresh two-year high, while up 970,000 bpd versus a year ago.

The U.S. data follows media surveys published earlier this week that estimated the Organization of the Petroleum Exporting Countries produced anywhere between 90,000 bpd and 210,000 bpd more crude oil in July than the prior month despite their 15-month agreement to cut production through March 2018. The surveys suggest that OPEC compliance has slackened after six months of cutting their output following an agreement they reached last fall to reduce production by a combined 1.2 million bpd, with 10 non-OPEC producers joining the effort with an output cut of 558,000 bpd. OPEC last week said they achieved a 98% compliance rate in June.

"The U.S. production increase is putting pressure on OPEC to increase compliance," said Cooper, adding that it comes just when the summer peak driving season is heading to a close on Labor Day, which will be observed on Sept. 4 this year. Gasoline consumption consistently declines in September.

As a result, market sentiment is becoming bearish, which could prompt liquidation of long positions in the futures complex, said analysts.

"From what I saw, the market started liquidating after Andy Hall was reported to be shutting down his hedge fund," said analyst Phil Flynn at Price Futures. "He has been the biggest bull in the oil market and now he's turned sideways, forecasting oil prices at $50 bbl. On a day with no news a story like that gets such a negative reaction from the market. There could be more liquidation."

At settlement, NYMEX September West Texas Intermediate crude futures lower 56cts at $49.03 bbl, off a two-day high of $49.96. October Brent crude oil futures on the IntercontinentalExchange settled 35cts lower at $52.01 bbl, off a two-day high of $52.89.

NYMEX September ULSD futures declined 1.99cts to $1.6389 gallon at settlement while the September RBOB futures contract settled 1.29cts lower at $1.6319 gallon.

On Friday, the oil market will consider the July payroll report from the Department of Labor due out at 8:30 AM ET and the weekly rig-count report scheduled for release by Baker Hughes, Inc. at 1:00 PM ET.

George Orwel can be reached at george.orwel@dtn.com