Two-day crude rally halted as focus returns to fundamentals

The oil complex settled lower Thursday as a two-day rally lost momentum and the market shifted its focused back to supply and demand fundamentals, while a stronger dollar provided downward pressure.

NYMEX August crude settled $1.55 lower at $48.33/b, while ICE August Brent settled down 93 cents at $49.68/b.

Prompt NYMEX crude had gained $3.55 in the previous two trading sessions, while ICE Brent was up $3.45 over the same period.

Refined products tracked crude lower, with NYMEX July RBOB settling down 2.34 cents at $1.5014/gal and NYMEX July RBOB 4.88 cents lower, flipping below RBOB after settling at a premium yesterday for the first time since February 29.

"The market continues to seesaw after Brexit drilled us lower," Gene McGillian, senior analyst at Tradition Energy, said. "The dollar is up pretty strongly today and that is probably behind some of the downward pressure."

The dollar index was trading 0.471 point higher at 96.240 at 2:30 pm EDT (1830 GMT).

Some market spectators cited the downside risk to prices from rising Nigerian output on the heels of a ceasefire agreement with the Niger Delta Avengers, a rebel group that unleashed a series of attacks on oil infrastructure that cut production by at least 400,000 b/d.

"After a furious two-day rally that eliminated most of the post-Brexit losses in equity and energy markets, petroleum prices are sliding once again this morning," TAC Energy said in a note. "A potential cease-fire agreement in Nigeria -- where crude oil production has been crippled by attacks on oil infrastructure -- is being credited with the selling so far, but it's worth noting that US and European equities are also taking a break from their recovery rally."

As a result, Nigerian oil production has recovered to 1.8 million-1.9 million b/d from 1.6 million b/d, and output should increase to 2.2 million b/d after repairs at the Forcados oil pipeline are completed next month, Nigeria's oil minister for state, Emmanuel Kachikwu, said this week.

"If sustainable, this ceasefire would pave the way for higher output, with the government optimistically aiming for a return to normal production by end-July," Goldman Sachs analysts wrote Wednesday night. "A normalization in production, even over several more months, would create downside risk to our $50/b 2H16 price forecast as it would bring the global oil market close to balance over that time period."

Expectations for lower crude prices have been reflected in deteriorating timespreads. The front-twelfth month contango widened from minus $2.81/b to $4.21/b over the course of June, while the same spread for NYMEX contracts grew from $2.51/b to $3.95/b.

Moreover, rising gasoline stocks will likely cap significant upside in the oil complex, with the NYMEX crude/RBOB crack spread declining by $4.15 over the course of the month to $14.68/b.

The losses across the oil complex came despite continued improvements in financial markets after Brexit losses earlier in the week.

The S&P 500 was trading 23.2 higher at 2093.97 at 3:15 pm EDT, while the Dow Jones Industrial Average was up 194.7 at 17,889.3.

Markets were likely buoyed after the Institute for Supply Management Chicago Purchasers Manager Index jumped 7.5 in June to 56.8, the highest since January 2015. A reading of 50 indicates no change.

--Jack Laursen, jack.laursen@spglobal.com

--Edited by Derek Sands, derek.sands@spglobal.com

http://www.platts.com/latest-news/oil/newyork/two-day-crude-rally-halted-as-focus-returns-to-21861415