The oil complex settled lower Monday after new data showing growing OPEC output cast doubt on the perceived rebalancing of supply and demand that sparked a price rally over the past month.
NYMEX June light sweet crude settled $1.14 lower at $44.78/b, while ICE July Brent ended the day $1.54 lower at $45.83/b. Refined products also fell, with NYMEX June RBOB down 4.16 cents at $1.5628/gal and ULSD settling 3.05 cents lower at $1.3555/gal.
"I thought the rally was overextended last week," Gene McGillian, senior analyst at Tradition Energy, said. "Today there was a reaffirmation of the supply glut after those OPEC reports, triggering some profit-taking."
A Bloomberg survey showed OPEC production increasing 434,000 b/d in April to 3.36 million b/d, while Reuters pegged the increase at 170,000 b/d, with output reaching 32.64 million b/d.
In both cases, Iran's efforts to ramp up output to pre-sanctions levels and near record high Iraqi exports drove the estimated increases.
On Sunday, an Iraqi official said its exports reached 3.36 million b/d in April, compared with 3.29 million b/d in March and just under the record 3.365 million b/d in November.
OPEC output reached a record of 32.65 million b/d in January, more than a year after the member states failed to agree to production limits in the face of falling prices.
The cartel will publish its official data for April on May 13.
"The petroleum markets have tipped to the downside in light May Day holiday trade on concern that OPEC production is on the rise, with Iranian output climbing to 3.4-3.5 [million b/d] in April, and Iraqi exports said to be running at a near-record level," Tim Evans, energy futures specialist at Citi, said.
While robust OPEC output likely gave pause to oil bulls, a series of relatively weak economic data releases in the US have called into question the direction of oil demand.
Manufacturing activity in the US expanded in April for the second consecutive month in April, according to the Institute for Supply Management, even though the growth was down from March and fell short of many analysts' expectations.
The Institute for Supply Management reported a reading of 50.8 for the manufacturing purchasing managers' index (PMI) in April, down from 51.8 in March. An index over 50 indicates an expansion in manufacturing activity.
"Weak manufacturing PMI data for April may be dampening demand expectations as well," Evans said. "We see risk of a significant intermediate-term correction to the downside, although a top may not yet be in place."
With many analysts suggesting the oil market is now significantly overbought, many market participants are moving to hedge their positions against a fall in prices.
"We saw some increased hedging activity as producers looked to lock in some of these higher prices, but I think it was a lot of speculative selling that drove us lower today," McGillian said.
Volume for the NYMEX $40/b June put option jumped Monday, with the option trading around 7,709 contracts. Open interest at that strike price was 37,452 contracts, up from just over 30,000 contracts Thursday.
If open interest continues to increase, this volume could suggest producers are looking to lock in a floor to prices.
Open interest data is delayed one day.
Following the expiration of the June contract, prompt ICE Brent futures have flipped back into contango after settling in a 76 cents/b backwardation Friday. Prompt Brent futures had been backwardated since April 15.
Timespreads for NYMEX crude futures have strengthened considerably in recent weeks, suggesting a tighter market. The spread between front- and second-month NYMEX futures averaged minus 86 cents/b last week, in from a contango of $1.19/b the prior week.
McGillian said the market remains focused on some of the positive signals that have emerged in recent weeks.
"I don't think [today's drop] is anything more than [profit-taking]. The market's sights seem set on declining US production and a stabilizing global economy," he said.
The US dollar continued to weaken Monday after sinking last week, but failed to boost crude futures.
The US dollar index was down 0.489 point at 92.593 at 2:30 pm EDT, reaching its lowest level since January 2015.
The dollar lost value last week after the Bank of Japan surprised the market by holding interest rates steady rather than cutting them further into negative territory and weak economic data in the US made a January interest rate hike less palatable for the Federal Reserve.
