Oil Tumbles as Federal Reserve Rate Boost Sends Dollar Higher

  • Cushing crude supply rose 1.22 million barrels last week: EIA
  • Futures closed at 17-month high Tuesday on OPEC, non-OPEC cut

Oil tumbled as the dollar climbed against its peers after the Federal Reserve raised interest rates for the first time this year.

Futures fell 3.7 percent in New York after closing at a 17-month high on Tuesday. The Fed also forecast a steeper path for rising borrowing costs in 2017. The advance of the greenback reduced investor appetite for raw materials priced in the U.S. currency. Prices dropped earlier after a government report showed that crude supplies at the biggest U.S. storage hub rose to a six-month high.

Oil has gained about 15 percent since the members of the Organization of Petroleum Exporting Countries agreed Nov. 30 to trim output for the first time in eight years. A deal reached over the weekend in Vienna to secure supply cuts from 11 non-OPEC producers means the accord encompasses countries that produce about 60 percent of the world’s crude.

"The Fed announcement is strengthening the dollar and that’s driving crude," Gene McGillian, manager of market research for Tradition Energy in Stamford, Connecticut, said by telephone. "The market has reacted positively to the OPEC agreement. Some of the optimism has worn off because we have to see them make the cuts and inventories are way too high."

West Texas Intermediate oil for January delivery dropped $1.94 to close at $51.04 a barrel on the New York Mercantile Exchange. The contract climbed to $52.98 on Tuesday, the highest settlement since July 14, 2015. Total volume traded was about 36 percent above the 100-day average at 3:01 p.m.

Brent for February settlement fell $1.82, or 3.3 percent, to $53.90 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude closed at a $1.81 premium to February WTI.

Cushing Glut

Crude stockpiles at Cushing, Oklahoma, the delivery point for WTI, rose by 1.22 million barrels to 66.5 million in the week ended Dec. 9, according to the Energy Information Administration. The hub had a working capacity of 77.1 million barrels as on Sept,. 30, according to the agency.

"The build at Cushing left supplies at 66.5 million, which is getting close enough to operational limits to raise concerns," said Thomas Finlon, director of Energy Analytics Group in Wellington, Florida, said by telephone.  "If the gains persist, we would soon be looking at a tricky situation."

Nationwide inventories declined 2.56 million barrels to 485.8 million. Supplies are at the highest seasonal level in more than three decades, according to EIA data. A 1.5 million barrel decrease was forecast by analysts surveyed by Bloomberg, and a 4.68 million barrel gain was reported Tuesday by the industry-funded American Petroleum Institute.

"We’re up an awful lot and the market was due for a pull back," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. "Cushing showed another build. The API completely missed the crude decline and we didn’t rally, which shows that the market needs to take a break."

Gasoline supplies climbed 497,000 barrels to 230 million last week. Stockpiles of distillate fuel, a category that includes diesel and heating oil, fell 762,000 barrels to 155.9 million, the first decline in five weeks.

Oil-market news:

  • Libya is preparing this week to reopen two of its biggest oil fields and ship the first cargo from its largest export terminal in two years, as the war-torn country pursues plans to almost double crude output in 2017.
  • The oil market has started to recover and the process will take some more months, Saudi Arabian Oil Minister Khalid Al-Falih said in Dhahran.
  • Russian companies including Gazprom PJSC signed a raft of initial agreements with Iran that could lead to contracts worth billions of dollars after the easing of sanctions on the nation.
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