Oil swings on China manufacturing slowdown

Oil fluctuated on Monday, erasing previous losses during the early European session. Prices were pressured as Chinas final HSBC PMI hit the lowest level since nine months, supporting the countrys concerning growth outlook, which was recently further trimmed by Goldman Sachs.

On the New York Mercantile Exchange, WTI crude for August delivery traded at $96.77 a barrel at 6:24 GMT, marking a 0.22% daily gain. Prices rebounded after days low of $96.08 during the Asian session and hit a days high at $96.87 per barrel around 6:30 GMT. Light, sweet crude settled 0.38% lower on Friday but still recorded a 2.73% weekly gain last week. However, WTI lost nearly 1% last quarter as concern over Feds monetary stimulus outlook and Chinas economic slowdown weighed on prices.

Meanwhile, Brent oil for August delivery stood at $102.25 a barrel, gaining 0.08% on the day at 7:24 GMT. Prices ranged between daily high and low at $102.40 and $101.66 that was touched around 1:50 GMT. The European benchmark settled 0.68% lower on Friday but ended the week 0.36% higher. Brent however settled lower for a third consecutive quarter, the longest streak of quarterly declines since 15 years.

Oil prices were pressured as operating conditions in Chinas manufacturing sector worsened during June for a second month in a row. The Asian countrys manufacturing PMI (HSBC PMI) stood at 48.2 in June, down from Mays 49.2 reading. Meanwhile, according to the National Bureau of Statistics and China Federation of Logistics and Purchasing, Chinas PMI fell to 50.1 last month, below Mays 50.8 figure.

According to HSBC and Markit Economics, Chinese manufacturers signaled a first reduction of output since eight months in June. Total new orders fell for a second month as client demand contracted. Staff numbers were also decreased, marking the fastest job shedding since last August.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “Falling orders and rising inventories added pressure to Chinese manufacturers in June. And the recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending, further exacerbating funding conditions for SMEs. As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months.”

China is the worlds second biggest oil consumer and accounted for 11% of global consumption in 2012, compared with 21% from the U.S. Any economic developments tied to the two countries have a strong impact on oil pricing and currently analysts expect demand to be troubled by Chinas slowdown. Lee Chen Hoay, an analyst at Phillips Futures said for Reuters: “Were likely to see China growing slower going forward and that is going to be reflected in slower oil demand growth.”

Last week the Asian countrys GDP forecast was once again cut, this time by Goldman Sachs. China’s economy is expected to expand by 7.4%, down from 7.8% and below the official target of 7.5%. The 2014 forecast was revised down to 7.7% from 8.4%.

This comes after The World Bank reduced its forecast for the nation’s economic growth to 7.7%, down from 8.4%. Earlier, during the last week of May, the IMF cut its own economy growth forecast to 7.75%, down from 8%.

Jonathan Barratt, the chief executive officer of Barratt’s Bulletin also commented on the topic for Bloomberg: “The data out of China is showing slowing. The data out of China is showing slowing.”

Last week oil prices were supported by positive U.S. and Germany economic data that boosted demand prospects. Germany’s retail sales both on monthly and annual basis exceeded expectations and gained 0.8% and 0.4% respectively. The leading EU nation’s Preliminary CPI also outperformed projections on both annual and monthly basis, standing at 1.8% and 0.1% respectively, compared to 1.7% and 0.0% forecasts.

Meanwhile in the U.S., the Chicago PMI disappointed by mismatching forecasts of 55.0 figure, standing well below at 51.6, also worse than May’s 58.7 reading. However, that bit of negative data was offset by the Final University of Michigan Confidence, which exceeded expectations of a gain to 83.0 and instead rose to 84.1, up from May’s 82.7.

Oil prices however remain capped by Feds monetary stimulus outlook. Investors have mainly been betting according to shifting expectations of an earlier-than-expected deceleration of the central banks Quantitative Easing. A stronger dollar, boosted by a possible scale back of the stimulus, reduces raw materials appeal as an alternative investment and makes the dollar-priced commodities more expensive for foreign currency holders.

Investors will be looking into this weeks key U.S. data that will show if the economys recovery keeps in line with Feds projections. The ISM Manufacturing index is due on Monday and the ISM Non – Manufacturing Composite index on Wednesday, coupled with the Trade Account, which is expected to show a 40 billion deficit. Factory Orders will be published on Tuesday. On Wednesday, the ADP Employment Change and Initial Jobless Claims will give a preliminary insight into the U.S. labor markets state, prior to Fridays most important Change in Non-Farm Payrolls and Unemployment Rate indicators.