Crude falls on China PMI worries and profit taking

By James Dennis

SINGAPORE (ICIS)–Crude futures fell by more than a dollar on Tuesday amid downbeat economic data from China and other Asian economies, while traders also took profit after a 8-9% rally in crude the previous day.

At 08:34 GMT October Brent crude on London’s ICE futures exchange was trading at $52.67/bbl, down by $1.48/bbl from the previous close. Earlier, the North Sea benchmark fell to a session low of $52.16/bbl, down $1.99/bbl.

October NYMEX light sweet crude futures (WTI) were trading at $47.64/bbl, down by $1.56/bbl from the previous close. Earlier, the US benchmark fell to a low of $47.23/bbl, down $1.97/bbl.

Despite price falls on Tuesday, Brent crude is up more than 24% and WTI up more than 27% after falling to the lowest levels in more than six years on Monday last week. Crude is now trading at levels last seen in late July.

Economic data from China and elsewhere in Asia indicated a further slowdown in manufacturing activity, new orders and exports.

The final Caixin general manufacturing purchasing managers’ index (PMI) for China fell to 47.3 in August from the reading of 47.8 in July.

“Chinese manufacturers saw the quickest deterioration in operating conditions for over six years in August,” Caixin said.

Meanwhile, the official China PMI for August fell to 49.7 in August, compared with 50.0 in July, official data showed on Tuesday.

August manufacturing PMI data from Taiwan was also lower at 46.1.

South Korea’s August manufacturing PMI figure of 47.9 also indicated continued contraction in output. 

Japan bucked the trend with an August manufacturing PMI figure of 51.7, but there were concerns over falling trade volumes with China.  

A PMI reading above 50 indicates an expansion, while a reading below 50 denotes a contraction in the manufacturing activities.

Traders also await the release of US manufacturing and vehicle data later in the day as well as weekly inventory data from the American Petroleum Institute (API).

Declines last week in US crude inventories helped provide upward pressure to prices last week.

Commenting on recent crude price movements, the Singapore‘s SGX said in its bi-weekly oil market report that: “The last two weeks have been testament to the volatility of financial markets and how they are intertwined with global commodity markets, which took a hit across the board.”

The oil price outlook is currently more pessimistic, with many international oil companies pushing their projections of oil price recoveries further back until 2017, SGX said.

On Monday Bank of America Merrill Lynch lowered its Brent crude forecast for 2016 to $55.00/bbl, while it expects Brent to average $55.66/bbl in 2015.

The oil market remains weighed down by oversupply issues.

The International Energy Agency (IEA) has estimated that supply exceed demand by 3m bbl/day in the second quarter of 2015.

Supply in 2015 has been boosted by record high production from OPEC members such as Iraq and Saudi Arabia.

US crude production and US crude inventories remain stubbornly high, although they are down from record levels hit earlier in the year.

Meanwhile, the IEA has said that it expects the oversupply to continue well into 2016 despite forecasts of increased demand.

Non-OPEC oil supply is expected to decline in 2016 as a result of spending cuts by oil companies. 

However, expectations of increased Iranian production once nuclear sanctions are lifted could dampen that impact.