Oil Futures Continue Crash as World Production Rates Grow
CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange again sold off Thursday, plunging to multi-month low settlements on the first day of November. Worry over a global oil supply shortage in the fourth quarter amid lost Iranian oil exports was replaced by sharp production increases and data showing a slowdown in world economic growth.
A nonstop stream of bullish news late in the third quarter, early fourth quarter about supply tightness in November and December amid U.S. sanctions on Iranian oil exports and talk of Brent crude reaching $90 bbl in December, potentially touching $100 bbl, has been replaced by headlines reporting production gains and slowing economic growth. The transition in the news flow lagged long liquidation by noncommercial traders, with speculators steadily unloading long positions since late September, and have reduced a net-long position in West Texas Intermediate futures to a one-year low. Open interest in WTI futures is at a more than 16-month low, according to the most recent data from the Commodity Futures Trading Commission
U.S. sanctions on Iranian oil exports begin Monday and expectations are the latest round of sanctions would reduce Iran's oil exports by 400,000 to 700,000 bpd from September after falling 800,000 bpd from April. Venezuela's oil production continues to decline amid mismanagement and economic collapse.
Geopolitics in the oil trade are usually associated with spiking oil prices. However, the October decline in global and domestic oil prices was driven by geopolitics and economics. Oil production by Saudi Arabia and Russia have surged reports show, as the Saudis likely changed their playbook after being implicated in the murder of a prominent dissident on Oct. 2.
Saudi crude production reached 10.7 million bpd in October and headed to an untested output rate of 11.0 million bpd, with the aim of the sharp ramp up to appease U.S. President Donald Trump who had repeatedly blamed the Organization of the Petroleum Exporting Countries -- and the Saudis in particular -- for colluding to keep oil prices high. During the summer months following a price run-up in June and pledge by the Saudis to boost production to ease supply tightness, the Saudis said the market didn't need the extra barrels and instead kept output flat. They said they were concerned about creating a supply surplus.
Now, despite downward revisions in world economic growth from early year projections, and mounting evidence that China's economy is suffering from a trade dispute with the United States, along with a mountain of debt, the Saudis continue to ramp up output.
On Wednesday, Reuters reported OPEC crude production reached 33.31 million bpd in October, up 390,000 bpd from September, and to the highest output rate since December 2016 -- a month before an OPEC/non-OPEC production agreement aimed at reducing world inventory took effect.
News emerged Thursday that the United States would grant India a waiver from sanctions on Iranian oil purchases, boosting available oil supply this month.
Economic data from China released this week shows the manufacturing sector in the world's second largest economy is on the verge of contraction. And, while U.S. manufacturing continues to expand, the growth rate has slowed amid a tight labor market, climbing costs and constraints in the supply chain.
The latest forecast from the International Energy Agency showing record global oil demand of 100.2 million bpd for the current fourth quarter also projects the world consumption rate would slow to 98.9 million bpd in the first quarter 2019, reflecting seasonal demand patterns. The nearest delivered Brent contract is now January.
At settlement, ICE January Brent crude futures settled down $2.15 at $72.89 bbl, the lowest settlement on the spot continuous chart since Aug. 21.
Despite a steep sell-off in the U.S. dollar after reaching a 16-month high Wednesday, NYMEX December WTI futures settled at a nearly seven-month spot low, down $1.62 at $63.69 bbl.
NYMEX December RBOB futures settled at an 8-1/2 month low on the spot continuous chart of $1.7165 gallon, down 3.49cts. On an intraday basis, there are only four sessions in 2018 -- all in mid-February -- that nearest delivered RBOB futures traded lower than Thursday, having traded at $1.6889 gallon.
NYMEX December ULSD futures settled at a $2.2008-gallon, 10-week spot low, down 5.06cts on the session. Fundamentals are strong for ULSD, with days of forward supply falling to the lowest level in more than three months at 30 days while heating demand is set to ramp higher later in the quarter.
Brian L. Milne, 1.609.371.3328, email@example.com, www.dtn.com. (c) 2018 DTN. All rights reserved.
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