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U.S. crude oil futures closed lower Tuesday, as traders appeared more worried about demand shortfalls than potential supply shortages from escalating tensions in the Middle East.
Weighing on prices, the U.S. dollar jumped to a one-month high as investors curbed expectations of an interest rate cut by the Federal Reserve in March.
Sentiment soured after the New York Federal Reserve reported its Empire State business conditions index plunged 29.2 points to negative 43.7.
Also, the latest weather forecasts for the U.S. Lower 48 states anticipate a switch from colder than normal this week to mostly warmer next week, which could hurt demand for heating oil.
Front-month Nymex crude (CL1:COM) for February delivery settled -0.4% to $72.40/bbl, surrendering early gains, while front-month March Brent crude (CO1:COM) closed +0.2% to $78.29/bbl.
ETFs: (NYSEARCA:USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (NRGU) (USOI)
Increased Middle East tensions pose supply risks for crude oil and liquefied natural gas, but “we are not seeing any fundamental impact on supply yet,” ING analysts Ewa Manthey and Warren Patterson wrote. “In order to see oil prices breaking significantly higher, we will need to see even further escalation and/or a meaningful loss in oil supply.”
“Crude’s continued disregard to the latest spurt in Middle East tensions does seem a bit surprising,” Vanda Insights founder Vandana Hart told Bloomberg. “It’s an indication of the extent to which the view on global oil fundamentals has turned bleaker.”
Separately, more than half of oil production from North Dakota was shut in because of freezing temperatures, with as much as 650K bbl/day offline, up from 425K bbl/day on Monday, according to the North Dakota Pipeline Authority.
North Dakota is the third largest U.S. oil-producing state, with output reaching 1.27M bbl/day in October.
