Oil Futures Tumble to Multi-Week Lows

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

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled at multi-week lows Monday on poor corporate earnings reports showing the economic slowdown in China is spreading to U.S.-based firms. This heightened anxiety over the global economy a week after the International Monetary Fund revised its growth outlook lower for the world economy while China reported the weakest economic expansion in 2018 since 1990.

Oil futures were also under pressure on news that the Trump administration is considering releasing oil from the Strategic Petroleum Reserve that would be timed to offset the effect of sanctions on Venezuelan oil sales. The news comes days after the United States recognized Juan Guiado, the president of Venezuela's National Assembly, as Venezuela's legitimate leader, and said Nicolas Maduro must go. Maduro was sworn into a second six-year term as Venezuela's president earlier this month following what has been described as fraudulent elections a year ago.

Venezuela is the third largest exporter of crude to the United States, averaging a little more than 500,000 barrels per day (bpd) in 2018. U.S. Gulf Coast refiners rely on Venezuela's heavy blend, with the global medium and heavy crude market tight. That tightness is due to an unrelenting decline in Venezuelan crude production under years of mismanagement, a falloff in Mexico's output, while oil sales from Iran have been reduced due to U.S. sanctions. Much of Canada's heavy oil is locked up north of the border because of limited pipeline capacity.

U.S. tariffs on a string of Chinese imports are seen to have hit an already vulnerable and overleveraged Chinese economy where consumer spending has also fallen off. Beijing's response to counter with tariffs on U.S. imports, and a retreat from globalization in general lamented at the World Economic Forum in Davos, Switzerland, last week, have slowed world trade and damaged export-driven economies such as China and Germany.

So far, the major arbiters in projecting global oil demand—the Energy Information Administration, International Energy Agency, and the Organization of the Petroleum Exporting Countries—have largely left their expectations intact, although offered caution over a potential quickening pace in the world economic slowdown. IEA continues to expect year-on-year growth in global oil demand at 1.4 million bpd, a faster pace than the 1.3 million bpd annualized growth rate for 2018. World oil demand in the first quarter is weakest, with IEA projecting demand in the current quarter down 1.0 million bpd from the fourth quarter 2018 to 99.2 million bpd, while seen averaging 100.6 million bpd in 2019.

All bets are off, so to speak, if the United States and China fail to reach some type of an accord bridging their differences over trade, and instead escalate their trade dispute. They have until March 1 to reach such an agreement before a 90-day truce expires, or risk an escalation in their trade dispute that could steer the world economy into a ditch. Vice ministers with China's government are in Washington, D.C. this week to meet with their U.S. counterparts, with the two sides set to meet Wednesday and Thursday (1/30-31).

The trade discussions coincide with the Federal Open Market Committee's two-day meeting Tuesday and Wednesday, with central bankers expected to maintain the federal funds rate at a 2.25% by 2.5% range after hiking the key interest trade 25 basis points at their December meeting. Minutes from the December FOMC meeting imply the Federal Reserve will hike the key lending rate by 25 basis points two more times this year, although officials have said they will remain data dependent.

A hawkish Fed is bearish for oil futures, so any deviation in Fed monetary policy will quickly be acted upon by the market, as experienced in December. A stronger U.S. dollar is also bearish for oil futures, with oil trading globally in the U.S. currency. A stronger dollar lifts procurement costs for foreign buyers that tends to pressure demand. The dollar softened for a second session after trading at a three-week high last week.

The determination of Saudi Arabia in clearing the global oil market of excess supply to boost crude prices is seen driving success for an OPEC+ 1.2 million bpd production cut agreement for the first half of 2019 reached in December.

Saudi energy minister Khalid Al-Falih is reported to have said the kingdom will produce 10.1 million bpd in February, which is below its 10.331 million bpd quota. The Saudi minister said Saudi output would remain below its cap for the full six-month period. In October, Saudi crude production was 10.663 million bpd.

Nymex March West Texas Intermediate futures settled down $1.70 at a $51.99 barrels (bbl) low on the spot continuation chart. ICE March Brent futures swung to a three-week low at $59.93 bbl ahead of expiration Thursday, with the April contract ending at a $0.12 discount to March. Brent's premium against softened to a fresh four-week low at $7.94 bbl.

Nymex February ULSD futures settled down 5.42 cents at a $1.8377 three-week low ahead expiration Thursday afternoon, with the March contract at a 0.31 cents discount in the seasonally backwardated market.

Nymex February RBOB futures settled down 5.63 cents at $1.3331 gallon, a four-week low, and widening its discount to March delivery. March RBOB futures settled down 5.29 cents at $1.3518 gallon.

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

(BAS)

Brian Milne