Oil Futures Plunge on Demand Concerns

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and Intercontinental Exchange Brent futures tumbled sharply Tuesday on concern over global demand. West Texas Intermediate lost nearly 5% in value, while both the WTI and Brent benchmarks settled at two-week lows, looking past an extension of 1.2 million barrels per day (bpd) output cuts by the Organization of the Petroleum Exporting Countries and its partners.

NYMEX August WTI settled $2.84 or 4.8% lower at $56.25 per barrel (bbl) after trading over $60 bbl prior session. ICE September Brent crude finished Tuesday $2.66 lower to settle at $62.40 bbl, after trading at five-week spot high on Monday. NYMEX August RBOB futures settled 6.02cts lower at $1.8703 gallon, while NYMEX August ULSD futures were down 6.75cts to finish the session at $1.8863 a gallon, two-week low on a spot continuous basis.

Oil markets moved sharply lower Tuesday afternoon, with declines accelerated after OPEC and a Russia-led group of 10 countries finalized a nine-month agreement to curb oil production by a combined 1.2 million bpd, rolling over supply cuts into a fourth year. Both benchmarks initially bounced on the news of the deal, but the price-boosting effect was short-lived even by oil market standards. Traders quickly shifted their focus back to global trade tensions and slowing economic growth, which have weighed on the market since early May.

"The global economy is slowing and it is a new reality for OPEC and Russia," said Richard Fullarton, CEO of hedge fund Matilda Capital Management.

For instance, oil prices added only 22% since the last decision by OPEC+ to limit supplies in December.

"The nine-month extension is a recognition that the first quarter is likely to see soft demand and exiting in December would have been unwise," said Saudi Arabia's energy minister on Tuesday, highlighting the group's tough balancing act amid slowing global demand and decelerating demand outlook.

According to ESAI analysis, annual growth in global fuel consumption tumbled last year by a sizable 900,000 bpd from 1.6 million bpd in 2017, driven mostly by lower naphtha and fuel oil demand in China. The Energy Information Administration and the International Energy Agency both revised their forecasts for oil demand lower in the current year.

Tuesday's selloff was primarily triggered by a slew of bearish economic figures on global manufacturing output, stoking market fears of continued weakness in the global economy. U.S. factory orders slumped to the lowest level since September 2016, while China's manufacturing activity contracted for the first month in four months. Global Purchasing Manager's Index declined for a 14th straight month to 49.4 in June, the longest decline on record, and to the lowest point since October 2012. The sharp contrast between market optimism and the steep decline in global manufacturing highlight market volatility in the coming months.

Preliminary data on U.S. crude stockpiles is set for release by American Petroleum Institute at 4:30 p.m. EDT, while EIA is scheduled to publish more definitive supply figures 10:30 a.m. EDT Wednesday. Market participants expect crude inventories to have fallen 2.6 million bbl in the week ended June 28. In refined products, gasoline stockpiles are estimated to have declined by 2.5 million bbl in the last week of June and stocks of distillates, which include heating oil and diesel, are expected to dip by 600,000 bbl.

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

(CZ)