Oil Mixed on Monday

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Brent crude on the Intercontinental Exchange sold off for a second straight session Monday. West Texas Intermediate futures settled below $50 bbl for the first time since early October 2017, as traders believe global oil demand in 2019 will be less than current expectations.

Another rout in equities trade maintained its bearish grip on oil futures, with stocks continuing an extended selloff during the final weeks of 2018 on concern over the world economy. This fear was exacerbated by data released late last week showing sluggish manufacturing and industrial activity in China in November and an ongoing downtrend in retail sales. The data are seen as signs the U.S.-China trade dispute is having a deleterious effect on the world's second economy.

The Dow Jones Industrial Average lost more than 500 points Monday and 1,000 points over the past two trading sessions.

The selloff also comes ahead of the Federal Open Market Committee's two-day meeting beginning Tuesday, with the Federal Reserve expected to lift the key federal funds rate 25 basis points to a 2.25% by 2.5% range before pausing monetary tightening in 2019. Higher borrowing costs would slow the pace of economic growth and bolster U.S. dollar strength, which eased Monday from a nearly 18-month high reached Friday.

Just ten days ago, the Organization of the Petroleum Exporting Countries, Russia, and nine non-OPEC oil producers agreed to a 1.2 million bpd production cut for the first half of 2019, while Alberta earlier this month mandated production shut-ins for the first quarter, equating to a 325,000 bpd production loss. The shut-in is aimed at clearing excess inventory and narrowing the deep discount Canadian oil is trading at against global markets.

Countering these efforts is U.S. oil production, namely shale oil, which is again set to increase in January despite a weak crude price. The Energy Information Administration Monday afternoon projected tight shale oil production in seven key U.S. producing regions would average 8.166 million bpd in January, up 134,000 bpd or 1.7% from December.

The short-cycle nature of shale oil production has confounded OPEC as well as analysts, with oil trader legend Andy Hall in a Bloomberg interview last week calling U.S. shale production "the great imponderable." Hall closed his Astenbeck Capital hedge fund in 2017 for heavy losses in crude trading.

The Financial Times said free markets are driving the price of oil following the end to restrictions on U.S. crude exports in late 2015 and prompted oil prices to consolidate at lower levels.

The latest round of selling comes ahead of the January WTI futures contract expiration Wednesday afternoon, with WTI settling down $1.32 at $49.88 bbl and the February contract ended $1.27 lower at $50.20 bbl. ICE February Brent settled down $0.67 at $59.61 bbl.

Price weakness caused by shale oil is seen in both the WTI to Brent spread, which widened to a $9.73 bbl WTI discount -- the largest discount in one-month, and WTI's forward curve that deepened its contango market structure through January 2020.

NYMEX January ULSD futures settled down 1.86cts at $1.8267 gallon, a 14-month low on the spot continuation chart despite the official beginning of winter on Friday. Warmer-than-usual weather is forecast from western Texas to the tip of southern Maine through the end of 2018, according to the National Weather Services' 8-14 day outlook.

NYMEX January RBOB futures lost 2.39cts with a $1.4104 gallon settlement.

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

(BAS)

Brian Milne