Oil Futures End Lower Thursday

LOS ANGELES (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange dropped Thursday, pressured by weakness in equities amid concerns over slowing global economic growth and crude supply glut.

The Dow Jones Industrial Average edged up over 1% after falling 600 points at Thursday's oil market close. Amidst this week's sharp price swings in equities oil futures became extremely volatile, while having already losing almost 1/3 of the value since the beginning of October.

NYMEX February West Texas Intermediate futures dropped $1.61 to settle at $44.61 per barrel (bbl), losing 4% of its value, while ICE February Brent crude slid $2.31 to $52.36 bbl settlement. NYMEX January ULSD futures lost 5.53 cents to settle at $1.6783 gallon while January RBOB futures shed 2.64 cents to $1.3040 gallon settlement.

The astounding selloff the fourth quarter was driven by multiple factors, but comes down to concern that supply will outstrip demand in 2019. As we moved through the fourth quarter right up to Christmas, concern over slowing economic growth escalated, with comments by Federal Reserve Chairman Jerome Powell on Dec. 19 at his press conference at the conclusion of the two-day Federal Open Market Committee sparking yet another rout in equities.

The fourth 25-basis-point increase in the overnight federal funds rate in 2019 to 2.5% was widely expected, even if equities were already signaling the central bank should pause. Yet, in his delivery in explaining strong growth prompted the monetary tightening, Powell and his tin ear said the U.S. economy faced headwinds but still said another two rate hikes are likely in 2019. Any confidence in the current strong U.S. economy gave way to concern over the potential for growth to slow in 2019.

Powell's comments amplified the fear contagion from slowing growth in the Chinese and European economies would drag the U.S. economy down, which had already pressured world oil prices. In the fourth quarter, part of the reason for those worries has been the U.S.-China trade dispute.

"One reason behind this loss in momentum is the implementation of tariffs by major economies -- especially the United States -- and retaliatory measures taken by others, including China," the International Monetary Fund said in a blog last week. "The increasingly protectionist rhetoric on trade has meant higher uncertainty about trade policy, which weighs on future investment decisions."

U.S. President Donald Trump and Chinese President Xi Jinping reached a 90-day truce to their trade dispute on Dec. 1, although it's unclear if negotiations between the two countries will yield an agreement. Failure to work out differences could escalate the trade dispute between the world's two largest economies into a long-lasting trade war with deleterious effects to the world economy and oil demand.

A stronger U.S. dollar, which reached a nearly 18-month high this month, has also had a negative effect on the world economy and slowed oil demand growth.

"Some vulnerable emerging market economies have come under strain as the U.S. dollar gained value and the level of risk that global financial investors were prepared to accept dropped," said IMF.

Oil trades globally in U.S. dollar denominations, so a stronger dollar inflates the crude procurement cost for foreign buyers. The combination of rallying oil prices and a strong dollar in the third quarter slowed economic growth in India, which rebounded in November as oil prices plummeted.

The International Energy Agency projects global oil demand would be about 100.1 million barrels per day (bpd) in the fourth quarter, a record high, and would decline to 99.2 million bpd in the first quarter. The decline is a seasonal feature, with global oil consumption the highest during the fourth quarter and weakest in the first quarter. Nonetheless, the seasonal downshift in consumption will weigh on oil prices, with that weight intensified if there are signs world oil consumption is slower than now envisioned.

Liubov Georges can be reached at liubov.georges@dtn.com