Oil Sinks on World Growth Headwinds

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange registered steep losses Tuesday on worry that world economic growth has peaked with the selloff provided an accelerant by comments from Saudi Arabia that they would lift production to an 11.0 million bpd record high.

The Saudis said they and their Gulf allies are in a "produce-as-much-as-you-can mode," engineered to offset production losses by Venezuela and Iran as the U.S. sanctions set to take effect in less than two weeks is seen sharply reducing Iranian oil exports. World oil demand is forecast to reach a record high of about 100 million bpd in the current quarter while spare world oil capacity has dropped to a minimal 2%. The Saudis hold most of that buffer supply, with Saudi Aramco, Saudi Arabia's state oil company, saying Tuesday it could increase production to 12.0 million bpd in three months.

Saudi Arabian Energy Minister Khalid al-Falih, one of the world's most influential individuals in oil markets, has granted several interviews this week pledging higher production. He said Saudi oil production is at 10.7 million bpd now, up from 10.5 million bpd in September, and is on its way to 11.0 million bpd.

The Saudi oil minister wants to ensure the world, and especially the United States, that the kingdom won't use oil as an economic weapon following a rare stumble by the Saudis two weekends ago suggesting that very action. The Oct. 14 statement by the Saudis followed comments by U.S. President Donald Trump that the United States would sanction the Saudis if the ruling party was found to have ordered the murder of Saudi dissident and journalist Jamal Khashoggi.

After weeks of denying knowing anything about Khashoggi's disappearance, on Oct. 19 the Saudis acknowledged he died at their consulate in Istanbul, Turkey. Their account that he died during a fistfight has not been viewed as credible however, and the believed cover-up has shaken the U.S.-Saudi relationship.

Turkey's President Recep Tayyip Erdogan earlier Tuesday rejected the Saudi commentary, and said it was a preplanned murder designed to silence a popular and vocal critic of the 33-year old Crown Prince Mohammed bin Salman. Erdogan stopped short in saying the crown prince and heir apparent to the Saudi throne had ordered the execution. The recent downturn in oil futures, with West Texas Intermediate and Brent futures reaching four-year highs in early October, also comes with concern over slowing world economic growth highlighted by a slowdown in China, where the U.S.-China trade dispute is seen having an adverse effect on the world's second largest economy.

Those worries triggered a steep selloff in equities in early trading, with the Dow Jones Industrial Average plummeting nearly 550 points to 24,768.79, its lowest value since early July. The DJIA has erased most of the decline late Tuesday afternoon, down about 125 points.

Tuesday's selloff comes in front of weekly supply data, with the market anticipating U.S. commercial crude stocks increased 2.5 million bbl during the week-ended Oct. 19. The market estimates gasoline supply was drawn down 1.5 million bbl during the week profiled and distillate stocks fell 1.4 million bbl. The American Petroleum Institute will release weekly supply estimates at 4:30 PM ET, and the Energy Information Administration their data set at 10:30 AM ET Wednesday. December West Texas Intermediate settled down $2.93 at $66.43 bbl, the lowest settlement on the spot continuous chart since Aug. 20. ICE December Brent dropped back $3.39 in value to a $76.44 bbl nearly two-month spot low.

The forward curve for WTI futures flipped into contango last week on building U.S. crude supply, while Brent remains in backwardation although the calendar spreads have narrowed. The changing market structure coincides with bearish market sentiment, with speculators unloading long crude positions for more than two weeks.

NYMEX November ULSD futures tumbled 6.97 cents to a $2.2484 gallon one-month settlement on the spot continuous chart, with below normal inventory as we head into the heating season lending support. NYMEX November RBOB futures erased 6.99 cents in value with a $1.8368 settlement, the lowest end day price in nearly eight months.

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

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Brian Milne