Oil Falls on Dollar, Oversupply

Oil futures fell Friday morning as optimism following a drop in U.S. stockpiles quickly faded.

Brent crude, the global oil benchmark, fell 2.2% to $47.04 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 2.5% at $44.37 a barrel.

Crude levels in U.S. storage fell by 6.3 million barrels in the week ended June 30, the U.S. Energy Information Administration said Thursday, which was almost three times the expectations of a 2.5 million-barrel decrease from analysts surveyed by The Wall Street Journal.

While the fall in oil inventories was "quite impressive", 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 per day last week, from 9.25 million barrels per day the week before. Production was up nearly 11% from a year ago and nearly back at its 10-month high.

Gains were also offset by ongoing concerns that global supplies aren't falling quickly enough, despite cuts led by the Organization of Petroleum Exporting Countries. Analysts say a reversal of a week-and-a-half oil price rally, which Wednesday's decline kicked off, looked set to continue for the near term.

"The rally after the API [American Petroleum Institute] and the EIA, maybe it was a step too far," said Warren Patterson, commodities strategist at ING Bank.

Globally, bearish dynamics remain as global inventories remain above five-year averages, with increased production from countries including the U.S. and Libya offsetting the effects of the OPEC-led cuts.

"It's been quite a crazy week," said Ole Hansen, head of commodity strategy at Saxo Bank. "We're quite clearly seeing a bull-bear fight playing out today in front of us."

Nymex reformulated gasoline blendstock was down 2.1% at $1.50 a gallon, while ICE gasoil fell 3.9% to $429.00 a metric ton.

Write to Biman Mukherji at biman.mukherji@wsj.com

Oil prices slid so far in just three sessions that it canceled out more than half of a two-week rally, with a deep plunge Friday from a surging dollar and re-emerging fears of oversupply.

The second half of this week brought some of oil's worst daily losses in months. The market dropped 6% in just three sessions, undermining what some had hoped was a long-coming turnaround.

Instead, bearish traders are returning quickly, brokers said, re-establishing a downward trend that took oil into a bear market this spring when many had predicted a steady rally toward $60 a barrel. 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 settled down $1.29, or 2.8%, at $44.23 a barrel on the New York Mercantile Exchange. Brent crude, the global benchmark, lost $1.40, or 2.9%, to $46.71 a barrel on ICE Futures Europe. Both had their seventh-lowest settlement of the year.

Both also lost ground for the sixth time in the last seven weeks. U.S. oil fell $1.81, or 3.9% a barrel this week. Brent lost $2.06, or 4.2%, its biggest percentage loss for any week in two months.

Friday's sharpest decline came early, 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 0.2%

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 selloffs. That has surprised many because drawdowns are typically considered a bullish signal of lower supply. Traders who move based on momentum, especially computerized-trading systems, have caught on to the recent, counterintuitive pattern and are selling as they have done several times this year, brokers said.

"It definitely reinforces the notion that momentum is at best sideways but really ... just negative," said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston.

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.

Friday's updated rig count from Baker Hughes Inc. also showed another in a lengthy string of increases. Oil producers added seven more rigs to their working fleet, which rose to 763, up more than double from the 351 at work a year ago.

"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," said Bill Baruch, senior strategist at Chicago brokerage iiTrader.

Concerns are also re-emerging 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 lost 3.03 cents, or 2%, to $1.4984 a gallon. They lost 1.53 cents, or 1%, for the week.

Diesel futures lost 3.37 cents, or 2.3%, to $1.4482 a gallon. They lost 3.49 cents, or 2.4%, for the week.

Both markets lost ground for the sixth time in the past seven weeks.

--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 16:36 ET (20:36 GMT)