Oil extends losses as China forces capacity cuts

Oil continued to fall on Friday, drawing closer to its first weekly decline in more than a month as the Chinese government forced 1 400 companies in over 19 industries to shut down excess capacity until the end of the year.

On the New York Mercantile Exchange, WTI crude for September delivery traded at $103.96 a barrel at 14:57 GMT, down 1.45% on the day. Prices ranged between days high at $105.64 and low of $103.92 per barrel, the lowest since July 9. Light, sweet crude settled 0.25% higher on Thursday but has declined 3.9% so far this week, after gaining 14% during the preceding four.

Meanwhile on the ICE, Brent oil with the same delivery month stood at $106.56 a barrel at 14:57 GMT, down 1.02%. Futures held in range between days high and low of $107.82 and $106.54 a barrel respectively. The European benchmark gained 0.58% on Thursday but is headed to a second straight weekly decline, marking a 1.7% fall so far this week.

Oil continued to fall on Friday as the Chinese Ministry of Industry and Information Technology ordered over 1 400 companies in 19 industries to cut surplus production capacity. Excess capacity must be idled by September and eliminated by the end of the year. This comes as part of Premier Li Keqiang’s efforts to restructure the country’s economy in order to achieve a slower but more sustainable growth. China’s overproduction has been pushing down industrial goods’ prices and put companies’ profits at risk, while the economy has been steadily slowing down.

Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut, said for Bloomberg: “The news that China is ordering the reduction of excess capacity has reignited concerns about slowing Chinese growth and what that’s going to mean for energy demand. We are still in the midst of a correction after reaching a 16-month high last week.”

Meanwhile, sentiment for oil remained bearish as data released by the EIA on Wednesday showed U.S. oil output reached a record-high pace. EIAs report showed that despite gasoline and distillate fuel stockpiles confounded analysts’ expectations for an increase, crude reserves matched expectations for a 2.8 million barrels drop and did not exceed them like the previous three weeks. Meanwhile, U.S. oil output rose to 7.56 million barrels per day last week, the highest since December 1990, which fueled concern over ample supply as half of the U.S. driving season has already passed.

On Friday, the Final University of Michigan Confidence index that is prepared together with Thomson/Reuters surged to a six-year high, but even that was not enough to push oil up. According to the survey, Julys consumer confidence in the worlds biggest economy rose to 85.1, the highest since July 2007, and exceeded forecasts for a jump to 84.0 from Junes reading of 83.9. Despite the rising confidence and the broadly weaker dollar, oil continued to fall, pressured by concern over demand in the second top consumer, China.

China’s data that was released on Wednesday showed the country’s manufacturing sector decelerated to an 11-month low in July according to the flash HSBC/Markit PMI. The index fell to 47.7, compared to June’s final reading of 48.2 and if confirmed in the final report on August 1, it will be the lowest in 11 months. Readings below 50 indicate contraction in the respective sector. Meanwhile, a sub-index that measures employment fell for a fourth consecutive month below 50 to 47.3 in July, below June’s 47.7 reading and the the weakest since March 2009.

ANZ analyst Natalie Rampono said for Reuters: “The market is focused on demand rather than supply. The weaker flash PMI numbers out of China on Wednesday is contributing to that weakness and keeping prices under a little bit of pressure.”