Oil futures settle higher, stemming recent slide

04:45 PM @ Wednesday - 29 October, 2014
Oil futures edged higher Tuesday, stabilizing above recent multi-year lows as ongoing weak fundamentals keep a lid on prices.

NYMEX December crude closed 42 cents higher at $81.42/b, while front-month ICE Brent settled up 20 cents at $86.03/b.

In refined products, NYMEX November ULSD ended the session 1.78 cents higher at $2.4931/gal, and front-month NYMEX RBOB closed 2.59 cents higher at $2.1961/gal.

"The market was catching its breath after crude sold off so sharply recently," Gene McGillian, senior analyst at Tradition Energy, said.

"We've seen a monumental policy shift on the part of the Saudis by living with lower prices and maintaining market share, so it's now a question of how much further down prices can go," he said.

Last week, NYMEX December crude prices closed as low as $80.52/b, a front-month low not seen since June 2012.

The crude complex remains focused on whether OPEC will try to halt oil prices from sliding further, Schneider Electric analyst Matt Smith said Tuesday in a client note.

"The expectation that the cartel will not do enough to limit its production continues to provide gale-force headwinds to the crude market in the face of rising global supplies," he said.

US tight oil output had been a major factor behind the increase, and that trend is likely to continue into 2015, Barclays analysts said in a note.

OPEC will struggle to rebalance supply and demand amid growing US oil production, pushing prices down in the process, the bank analysts said.

Barclays lowered its oil price forecast for the first half of 2015 by $6 -- to $88/b for Brent and $79/b for NYMEX crude.

Goldman Sachs on Monday cut its price forecast for the 2015 first quarter by $15 to $85/b for Brent and $75/b for NYMEX crude.

US economic data released Tuesday sent a mixed message. Durable goods orders, excluding aircraft, fell 1.7% in September, the Department of Commerce said. It was the largest decline in core capital goods orders -- a proxy for factory activity -- since January.

The Conference Board consumer confidence survey showed the strongest reading since October 2007. The index reached 94.5, up from 89 in September.

US oil inventory reports this week, expected to show another build in crude stockpiles, could put more downward pressure on prices, said Tariq Zahir, managing member at Tyche Capital Advisors.

"I wouldn't be surprised to see WTI breaking new lows in the next few days," he said. "We continue to see a situation where supply is outpacing demand, causing prices to go lower."

FED MEETING IN FOCUS

Another event analysts are keeping an eye on is the Federal Reserve's policy-setting committee meeting, held Tuesday and Wednesday. There is a widespread expectation the Fed will announce plans to end its asset-purchasing program.

Attention will also be focused on whether the Fed keeps its previous language, saying the first interest rate hike will occur after a "considerable" period once the so-called quantitative easing concludes.

The underlying debate hinges on whether the US economy is strong enough to allow the Fed to raise interest rates. But recent signs of slowing inflation, below the Fed's 2% target, have cast doubts the recovery has reached the stage to justify tighter monetary policy.

Low inflation -- not only in the United States, but also in Europe and China -- spells other consequences, as far as its impact on oil demand, according to analyst Philip Verleger.

The conventional wisdom that falling oil prices provide an economic stimulus, leading to increased oil consumption, does not hold when deflation is present, he said in a research note this week.

Consumers and businesses spend less when prices are falling, and moreover, declining oil prices put more downward pressure on inflation rates, Verleger said.

The possibility lower oil prices do not help revive demand implies a more bearish outlook than other forecasts in which the connection still exists.

Energy Aspects, for example, said in a client note this week that rising gasoline demand in China, India, South Korea and Europe is being driven by lower oil prices.

The consultancy estimates that the recent $30/b decline in oil prices has translated into an increase in global GDP by potentially 0.75 percentage point.
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