Oil Futures Take Another Step Lower

Oil Futures Take Another Step Lower

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and the Brent contract on the Intercontinental Exchange deepened their selloff Tuesday. West Texas Intermediate and Brent plunged more than $3 bbl on thoughts global oil inventory will expand in 2019 as demand flags under the weight of a slowing world economy, while supply grows despite a production agreement set to cut 1.2 million bpd for the first six months of 2019.

The world economy has already slowed, with recent data from China and the eurozone detailing a further decline in key economic sectors in November, including industrial and manufacturing, while the malaise is spreading to retail. The slowdown is linked primarily to the U.S.-China trade dispute. Odds for a "hard Brexit" in March when the United Kingdom is set to leave the European Union add to trade woes. The market fears contagion from a sluggish world economy should the U.S.-China trade dispute escalate and that is seen pulling the U.S. economy into the downdraft.

A stronger U.S. dollar, which reached a nearly 18-month high on Friday, has also exerted pressure on emerging economies with debt pegged in the greenback. Tightening monetary policy in the eurozone and the United States have prompted analysts to dial back economic growth expectations even before the latest round of selling.

Steep selloffs in equities through Monday are signaling the alarm that the Federal Reserve should hold pat and not lift the federal funds rate, which central banks in the past have largely ignored. Those concerns were reflected in the 1,000 point combined drop in the Dow Jones Industrial Average on Friday and Monday, with the index up more than 80 points in choppy trade late afternoon.

The Federal Open Market Committee began its two-day meeting Tuesday, with a press release scheduled for 2 p.m. EST Wednesday when the central bank will tell markets if they raised the federal funds rate 25 basis points as widely expected, which would bring the key interest rate to 2.25% by 2.5%. Many in the market think tightening monetary policy now would slow economic growth in the United States, as it raises borrowing costs. They contend that, while the U.S. economy remains strong, it is not as strong as it was earlier in the year when countries around the globe were largely growing in synch with one another. Some fear higher borrowing costs tied with a potential escalation in the U.S.-China trade dispute could pool a global convergence that prompts recession. These concerns are prodding a reassessment of global oil demand, with slowing economies using less energy.

The latest selloff suggests prior Thursday's assessment by the International Energy Agency that the Dec. 7 agreement by the Organization of the Petroleum Exporting Countries, Russia and nine other non-OPEC oil producing countries cutting 1.2 million bpd in output early next year put a floor under crude prices was misplaced. In addition to the Vienna agreement, Alberta has mandated 325,000 bpd in oil production to be shut-in during the first quarter 2019 to clear inventory and bolster heavily discounted Canadian crude.

NYMEX January WTI futures settled down $3.64 at $46.24 bbl, the lowest settlement on the spot continuation chart since late August 2017, with the February contract settling down $3.60 at $46.60 bbl. January WTI futures expire at Wednesday's close.

Speculators have unwound length in WTI futures for 11 consecutive weeks through Dec. 11, the most current data from the Commodity Futures Trading Commission shows, with their net-long position the lowest in two years.

ICE February Brent futures lost $3.35 with a $56.26 bbl settlement, a 14-month spot low.

NYMEX January ULSD futures dropped back 7.28cts to a $1.7539 gallon settlement that was the lowest spot month settlement in more than 14 months. NYMEX January RBOB futures erased 5.99cts in value with a $1.3505 gallon better than two-year low settlement on the spot continuous chart.

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

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Brian Milne