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Oil complex settles lower as strong dollar snaps rally

New York — An overbought oil complex settled sharply lower Thursday amid a surging US dollar and still-bearish fundamentals.

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ICE June Brent settled $2.23 lower at $65.54/barrel, while NYMEX June crude settled $1.99 lower at $58.94/b. Products were lower as well, with NYMEX June ULSD leading the way, down 5.44 cents at $1.9617/gal. June RBOB settled 4.63 cents lower at $1.9903/gal.

The US Dollar Index was around 94.64 at the NYMEX close, a day after dipping to 93.88, the Index's lowest since mid-February.

Price Futures Group energy analysts Phil Flynn said the downturn in the oil complex -- and likely the resurgence in the dollar -- could have been supported by comments by US Federal Reserve Chairwoman Janet Yellen Wednesday.

"Oil seemed to lose momentum as stocks sold off hard after Fed Chairperson Janet Yellen said that 'I guess I would highlight that equity market valuations at this point are generally quite high,' " Flynn said.

But Flynn also pointed towards weak product fundamentals as key to deflating any rally in oil futures.

"The product numbers were not as bullish as hoped for as gasoline demand dipped and distillate supply increased instead of falling," Flynn said. "The EIA said demand dropped last week despite the fact that farmers planted almost a record amount of corn and beans last week."

US Energy Information Administration oil data showed US Midwest low and ultra low sulfur diesel stocks at 33.72 million barrels, a comfortable 17.6% above the five-year average.

"Perhaps that will show up in next week's numbers. The Midwest region still looks well supplied and that may be another reason the bloom seemed to come off of the bullish rose," Flynn said.

In fact, Midwest ULSD differentials to prompt NYMEX ULSD were heard around 7 cents/gal higher Thursday, Platts data shows, on refinery buying and stronger underlying agricultural demand.

Analysts said that the run-up in both Brent and NYMEX crude futures -- which have risen 45% and 37%, respectively, since end-January -- was likely overdone and due for a correction.

"There is a lot of froth in this market," Tradition Energy senior analyst Gene McGillian said. "When you have this much speculative length you tend to get sizable moves, but I don't see any real fundamental tightening."

US Commodity Futures Trading Commission data shows speculative entities -- money managers and other reportables -- have a combined net long crude position of 314,844 contracts for the week that ended April 28, up from just 206,887 contracts a month earlier.

The two groups hold a combined 39% of the crude futures market.

Rather, McGillian pointed to starkly bearish headline production figures not only from the US, but also from Saudi Arabia, Russia and Iraq.

"Yesterday's [Energy Information Administration] data showed the first crude draws here in the US in a long time, but the fact is we are still at 85-year highs in terms of inventory, and production is at a 40-year high," he said.

"With the Saudis' willingness to produce over 10 million b/d, the Russians hitting 10.7 million b/d of total crude and condensate production, and Iraq over 3 million b/d," the market is clearly in no shortage of supply, McGillian said.

Tanker tracker Oil Movements said Thursday that OPEC exports are expected to rise 390,000 b/d over the four weeks to May 23 to 23.65 million b/d.

--James Bambino,
--Edited by Derek Sands,