DTN Oil

Oil Nosedives as USD at 20-year High, Demand Outlook Darkens

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the front month Brent crude contract on the Intercontinental Exchange settled Tuesday's session with sharp losses, spearheaded by deepening fears of a recession in the Eurozone that sent the euro towards parity with the U.S. dollar for the first time in 20 years, and downward revisions to global oil demand from major forecasting agencies as crippling fuel shortages in Europe and elsewhere are seen leading to protracted demand destruction.

U.S. dollar index made fresh highs Tuesday, surging towards the highest trade against a basket of foreign currencies since October 2002 at 108.420, while weighing on the front-month West Texas Intermediate contract that settled the session below $96 bbl. U.S. crude benchmark nosedived $8.25 bbl on Tuesday for one of the largest one-day declines of the year.

International crude benchmark Brent for September delivery settled below $100 bbl for the first time since early April, shedding $7.61 bbl on the session. NYMEX August RBOB futures plummeted 19.76cts for a $3.2646 gallon settlement, while front-month ULSD fell more than 10.5cts to $3.6626 gallon.

Tuesday afternoon, traders also positioned ahead of the release of weekly inventory data from the American Petroleum Institute on tap for 4:30 PM ET, followed by government statistics Wednesday morning.

Analysts anticipate U.S. oil inventories declined by 900,000 bbl for the week ended July 8, with estimates ranging from a decrease of 5.7 million bbl to an increase of 4 million bbl. Gasoline stockpiles are expected to have also decreased by 900,000 bbl from the previous week, while distillate inventories are expected to have risen by 1 million bbl.

Refinery use likely rose by 0.3% from the previous week to 94.8%. Estimates range from a decrease of 0.5% to an increase of 1.5%.

Underlining Tuesday's selloff are ongoing concerns over protracted recession in Eurozone, with those fears heightened amid the shutdown of Nord Stream 1 -- the single largest pipeline carrying Russian gas into Germany, for annual maintenance. The line is scheduled to be out of action until July 21 for routine work that the operator says includes "testing of mechanical elements and automation systems," but European officials are suspicious about Russia's intentions, particularly after Gazprom last month reduced the gas flow through Nord Stream 1 by 60%.

Germany and the rest of Europe are scrambling to fill natural gas storage in time for winter and reduce their dependence on Russian energy imports.

International Energy Agency Director Fatih Birol warned on Tuesday that the world has yet to see the worst of the energy squeeze, adding that "the crisis is unparalleled in its complexity and depth."

An economic survey out of Germany, the Eurozone's largest economy, showed a remarkable deterioration in business activity across energy-intensive and export-oriented industries in July. Index of expectations for the next six months has fallen to a -53.8 from -28 in the previous month, with experts citing inadequate energy supplies behind the sudden drop in economic activity. Germany reported its first monthly trade deficit since 1991 at the end of the second quarter as manufacturers struggled to absorb surging costs for imports and softer demand for their products in Asia.

Economists polled by Bloomberg estimate the probability of Eurozone recession has increased to 45% from 35% in the previous month and from 20% before Russia invaded Ukraine. Germany, one of the most vulnerable members of the currency bloc to cutbacks in Russian energy flows, is more likely than not to see economic output shrink.

Separately, Organization of the Petroleum Exporting Countries in its Monthly Oil Market Report released this morning downgraded its second quarter demand projections to 98.33 million bpd from 99.33 million bpd seen in the first quarter. For the year, however, global oil demand growth is projected to remain unchanged from the previous month's assessment at 3.4 million bpd. Oil demand in the developed and industrialized countries is estimated to increase by 1.8 million bpd, while developing countries are seen growing by 1.6 million bpd. Total oil demand is projected to average 100.3 million bpd.

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

Liubov Georges