Oil prices decline on risks to energy demand, strong USD and possible boost Libya output

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February 7, 2019 12:10pm NYSE:USO

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From Myra P. Saefong & Rachel Koning Beals: Oil futures declined on Thursday, pressured by risks to energy demand, a stronger dollar and reports that Libya could soon increase production.

U.S. benchmark March West Texas Intermediate crude oil US:CLG9 fell $1.47, or 2.7%, to $52.54 a barrel on the New York Mercantile Exchange, with prices trading nearly 5% lower week to date.

International benchmark April Brent LCOJ9, -2.33% fell 92 cents, or 1.4%, to $61.77 a barrel on ICE Futures Europe.

The decline in oil, following gains on Wednesday, “came on the back of fresh risk based sell off, after the European Commission slashed growth forecasts for the Eurozone and its major economies sharply for 2019 and 2020, further stoking concerns of a global growth slowdown,” analysts at ICICI Bank wrote in a note Thursday.

Traders shunned assets perceived as risky, sending European stocks and U.S. benchmark stock indexes lower.

The ICE U.S. Dollar Index DXY, +0.05%  was up less than 0.1% Thursday, but traded up 0.9% week to date. The gauge was trying for sixth advance in a row, according to FactSet. A firmer greenback tends to weigh on sentiment for all commodities. A richer dollar makes those commodities priced in the unit less attractive to investors using another currency.

Meanwhile, a Libyan general took control Wednesday of the country’s largest oil field, the Sharara, raising the likelihood the facility will restart production, according to the Wall Street Journal. The added supply could bring more oil to the global market and put downward pressure on prices. The Sharara facilities, which can pump roughly 315,000 barrels a day of crude, were shut down late in 2018 after a group of armed gunmen took control of the field demanding better living conditions in the region.

Libya, a member of the Organization of the Petroleum Exporting Countries, is currently exempt from the cartel’s agreement to curb production due to the civil unrest that has plagued its oil industry and economy.

The Organization of the Petroleum Exporting Countries and 10 partner producers outside the cartel agreed late last year to hold back crude output by 1.2 million barrels a day for the first half of 2019, in an effort to sop up that global supply glut and rebalance the market. OPEC, excluding Iran, Libya and Venezuela, agreed to handle 800,000 barrels a day of those cuts.

On Tuesday, The Wall Street Journal reported that OPEC officials said Saudi Arabia and its Persian Gulf allies were looking to create a formal partnership with a 10-nation group led by Russia to manage the world’s oil market.

“OPEC+ has a history of delivering on promised cuts which have been effective in bringing down output and lifting prices, albeit not sustainably,” said Craig Erlam, senior market analyst at Oanda.

“U.S. output is at record levels, but the [active U.S. oil] rig count has been headed in the wrong direction for a couple of months,” he said. And “Venezuela and Iran output is expected to decline which could aid the efforts of the OPEC+.”

Oil prices trade higher year to date, with WTI front-month contract prices up about 16%. The political crisis in Venezuela was part of the reason prices were rising in previous weeks, but this seems to have been priced in by now, some analysts have said.

In the U.S., domestic crude supplies rose by a less-than-expected 1.3 million barrels for the week ended Feb. 1, the Energy Information Administration reported Wednesday.

“Much of the gains in oil has coincided with a similar rebound in equity markets and risk appetite, if that turns then regardless of these other factors, oil may tumble with it,” said Erlam, in a daily note.

In other Nymex trading, March gasoline RBH9, -3.52%  fell 3.3% to $1.411 a gallon, and March heating HOH9, -1.57%  fell 1.3% to $1.888 a gallon.

March natural gas NGH19, -2.97% fell 2.9% at $2.584 per million British thermal units.

The EIA on Thursday said domestic supplies of natural gas fell by 237 billion cubic feet for the week ended Feb. 1. That was smaller than the 249 billion-cubic-foot decline expected by analysts polled by S&P Global Platts.

–Christopher Alessi contributed to this report.

The United States Oil Fund LP (USO) was trading at $10.99 per share on Thursday morning, down $0.33 (-2.92%). Year-to-date, USO has declined -8.49%, versus a 1.31% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of MarketWatch.

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