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U.S. crude bounces off multi-year lows, ahead of API inventory report

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Shutterstock photo - -- U.S. Crude futures bounced off multi-year lows on Tuesday, amid heavy short covering as investors continued to grapple with near-record supply levels which have depressed prices for the majority of the calendar year.

On the New York Mercantile Exchange, WTI crude for February delivery traded between $35.66 and $36.53 a barrel before settling at $36.14, up 0.33 or 0.97% on the session. When the January contract for WTI crude expired on Monday, the front month contract for U.S. crude traded near $34 a barrel, its lowest level since February, 2009. In spite of Tuesday's rally, U.S. crude futures are still down by nearly 12% since OPEC left its output quota unchanged at a closely-watched meeting earlier this month.

On the Intercontinental Exchange (ICE), brent crude for February delivery wavered between $35.98 and $36.72 a barrel before closing at $36.12, down 0.22 or 0.54% on the day. One day after North Sea brent futures fell sharply to $36.04, its lowest level since July, 2004, the international benchmark dipped to fresh 11-year lows on Tuesday.

Meanwhile, the spread between the U.S. domestic and international benchmarks of crude was nearly flat at 0.02, down from a 0.54 premium on brent at the end of trading on Monday. At Tuesday's close, brent's premium on WTI crude swung to a discount, as the aftershocks of last week's repeal of a 40-year ban on U.S. exports continued to be felt. The spread is down by more than 95% from its peak around $4.00 a barrel at this time last year. It marked the first time WTI crude closed above brent since August, 2010.

Both benchmarks have plummeted by more than 50% since OPEC rattled markets last November by leaving its production ceiling above 30 million barrels per day in an effort to defend its market share.

Investors await the release of the American Petroleum Institute's weekly inventory report after the close of trading for further indications on demand levels among the world's largest consumer of oil. Separately, Wednesday's U.S. government report could show that U.S. crude stockpiles rose by 1.4 million barrels for the week that ended on Dec. 18. A week earlier, domestic crude inventories increased by 4.8 million barrels to 490.7 million barrels, its highest level in at least 80 years.

There are few signs that the massive gulf in the supply-demand equilibrium will tighten any time soon. Earlier this month, the Paris-based International Energy Agency (IEA) forecasted that global demand will grow by 1.2 million barrels per day, down from its 2015 expectations for growth of 1.8 million bpd.

At the same time, the IEA expects non-OPEC production to decrease by 600,000 bpd in 2016 as high-priced U.S. shale producers continue to get squeezed out of the market from crashing oil prices . The agency anticipates that U.S. domestic output will decline by 415,000 bpd next year, comprising nearly 70% of the total non-OPEC declines. By comparison, global production outside of the powerful cartel surged by an estimated 2.4 million bpd in 2014, contributing to the current supply glut.

The are signals that OPEC could be forced to curtail production, as well, as its output hovers around 31.70 million barrels per day, up roughly 5% over the last year. OPEC's annual revenues are on track to decline by approximately $500 billion amid tumbling crude prices, while Saudi Arabia's budget deficit is expected to fall in the 20% range for next year. The kingdom pumped more than 10.1 million bpd last month.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.35% to an intraday low of 98.01. Earlier this month, the index eclipsed 100.00, reaching its highest level on the calendar year.

Dollar-denominated commodities such as crude become more expensive for foreign purchasers when the dollar appreciates. offers an extensive set of professional tools for the financial markets.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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