Oil eases on good supply picture, fed easing fears
NEW YORK -- U.S. oil futures fell more than $1 per barrel on Monday on the view that supplies were ample, along with worries that demand could weaken after a U.S. Federal Reserve policy maker suggested the central bank may taper its bond buying program.
Brent crude also fell, but the steeper drop in U.S. oil prices widened Brent's premium by 70 cents.
The president of the Federal Reserve Bank of New York, William Dudley, said he was "getting more hopeful" on prospects for U.S. economic recovery, suggesting that the Fed may ease up on the commodity-friendly bond-buying program.
Fed Chairman-nominee Janet Yellen signalled last week the central bank would need stronger evidence of economic growth before tapering. While Dudley is a permanent voter on the Fed's policy-setting committee, "people are really kind of watching what Yellen plans to do," said Gene McGillian, analyst with Tradition Energy in Stamford, Connecticut.
After Dudley's comments another central banker suggested fixing a dollar amount on the current bond-buying program and end it when that amount is reached.
January Brent crude had fallen 21 cents to $108.29 a barrel at 1:43 p.m. EST.
U.S. crude for December delivery was 94 cents lower at $92.90, after hitting a session low of 92.72. The December contract expires at the end of trading on Wednesday.
U.S. oil's discount to Brent widened by 70 cents to $14.71. U.S. crude prices had drawn support recently from hopes that refiners coming back online from maintenance would draw supplies from the storage hub in Cushing, Oklahoma, but those bets have dried up in the near-term, said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis.
"Oil is bottled up in Midwest and can't go anywhere," he said. "Even with the drop we've seen in WTI, Brent has fallen much less."
In the longer term, he said he still expects that as refiners come back online "that should help narrow that gap and help WTI gain on Brent."
The oil market was trying to rebalance as refineries come out of seasonal maintenance, which will increase oil demand, while it faces rising supplies.
Saudi crude production rose close to 10 million barrels per day, the highest average level sustained over a four-month period since government records began in 2002. In the U.S., production in North Dakota is nearing 1 million bpd.
The U.S. market is in flux as a major Midwest refinery in Indiana burning light, sweet crude moves toward burning heavy oil and as light sweet crude production in North Dakota competes with burgeoning Texas supply.
"The market is trying to figure out what's happening with the flow of oil," said Stephen Schork, editor of the Schork Report in Villanova, Penn. "You're seeing demand destruction in Indiana coupled with increased price competition, while demand is picking up."
Tensions in Libya helped keep a floor under oil prices. The country's deputy intelligence chief was kidnapped on Sunday, highlighting the country's internal strife which has sharply reduced its oil exports.
Libyan crude oil exports have fallen by more than 1 million bpd over the last six months as fighting between rival militias and industrial unrest has spread across the country. Analysts see little sign of an immediate end to the turmoil.
Investors also awaited news from a meeting beginning on Wednesday between Iran and world powers over ending its nuclear program that may provide insight on whether sanctions against Iran would be lifted and, if so, when.
Sanctions against Iran have kept around 1 million barrels per day (bpd) of oil from the global market and any deal could allow some of that oil to be sold, depressing a market that is already well supplied.
Hedge fund positioning points toward lower prices. Fund managers cut their net long U.S. crude futures and options positions in the week to Nov. 12 for the second week in a row. Large investors in Brent crude cut their net long positions in Brent crude futures and options to their lowest for a year.