Oil Falls on Dollar, Oversupply

By Timothy Puko Features Dow Jones Newswires

Oil prices slid further Friday after a surge in the dollar, accelerating an already sharp downturn tied to re-emerging fears of oversupply.

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Two of the last three sessions have brought some of oil's worst daily losses in months. The market is down 6.3% in that span, cutting more than half the gains that had come from a nearly two-week rally.

Bearish traders are quickly returning to the market, brokers said, re-establishing a downward trend that took oil into a bear market this spring instead of the steady rally toward $60 a barrel that many expected. Most of the issues this week are the same as they have been for months--the ineffectiveness of major output cuts by the world's biggest exporters and rising U.S. production--- with a strong dollar now hurting, too.

"It all adds up to sell, sell, sell. It's a long list of bearish" factors, said Donald Morton, senior vice president at Herbert J. Sims & Co., who runs an energy-trading desk.

Light, sweet crude for August delivery recently lost $1.46, or 3.2%, to $44.06 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, lost $1.53, or 3.2%, to $46.58 a barrel on ICE Futures Europe.

The most recent leg of losses came in concert with a dollar surge that started after the monthly U.S. employment report. Nonfarm payrolls rose by a seasonally adjusted 222,000, more than the 174,000 economists had expected, the Labor Department said Friday morning. The WSJ Dollar Index, which measures the U.S. currency against 16 others, rose afterward and was recently up 0.3%

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A stronger dollar makes dollar-traded oil more expensive for foreign buyers. Oil futures often fall when that happens.

The market already was weighed down by a selloff that began Thursday afternoon. Prices had initially rallied in that session after the U.S. government reported crude levels in U.S. storage fell by 6.3 million barrels in the week ended June 30, nearly three times what analysts had predicted. But the data also showed a sharp rise in U.S. production, and bearish traders took advantage of the rally to return to the market and sell from a higher price, brokers said.

That fits a pattern that emerged earlier this year when sporadic, but sometimes very large drawdowns from storage often didn't lead to strong rallies and sometimes led to sell-offs. Drawdowns are seen as a bullish sign about falling supply. Traders who move based on momentum, especially computerized-trading systems, are seeing the pattern and selling again, brokers said.

"Right now momentum has turned down," said Bill Baruch, senior strategist at Chicago brokerage iiTrader. "There's a lot of (bearish traders) that were in this market that got squeezed last week, and ultimately they want to be back in."

Markets are concerned that agile U.S. producers are increasing production, says Michael McCarthy, chief markets strategist CMC Markets. Data from the EIA also showed U.S. production increased to nearly 9.34 million barrels a day last week, from 9.25 million barrels a day the week before. Production was up nearly 11% from a year ago and nearly back at its 10-month high.

"The rally...maybe it was a step too far," said Warren Patterson, commodities strategist at ING Bank.

Concerns are also reemerging about a deal from the Organization of the Petroleum Exporting Countries, Russia and other major exporters to cut output by around 1.8 million barrels a day. That was supposed to lead prices higher, but traders said rising production from members with exemptions from the deal and the U.S., which isn't part of it, are going to prevent OPEC from really shrinking world oversupply and bloated stockpiles.

OPEC is considering putting a limit on how much oil members Nigeria and Libya can pump, cartel delegates say. Libya's crude-oil output has surged to more than one million barrels a day, up from 400,000 in October, while Nigeria's output has risen to 1.6 million barrels a day, up 200,000 barrels a day since October, according to JBC, a Vienna-based energy-industry consultancy.

In June OPEC exported more crude than it had in October, the reference level for the deal, data-tracking firm ClipperData said Friday morning. It reported global crude exports are up 10% from a year earlier, with every country in OPEC but Algeria and Qatar raising exports in that span.

"While hope springs eternal, reality bites," Matt Smith, director of commodity research at ClipperData, wrote about OPEC's attempt to raise prices.

Gasoline futures recently lost 2.7% to $1.4874 a gallon. Diesel futures lost 3% to $1.438 a gallon.

--Justin Yang, Biman Mukherji, Benoit Faucon and Summer Said contributed to this article.

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

July 07, 2017 12:42 ET (16:42 GMT)