Oil rallies on China data, supply disruptions

Both West Texas Intermediate and Brent benchmarks surged in early European trade on Monday as an expanding services sector in China and persisting supply disruptions in North Africa and the Middle East supported prices. Gains however remained limited as the U.S. Department of Labor reported on Friday the worlds biggest economy created less jobs than analysts expected in July, spurring concern over demand.

On the New York Mercantile Exchange, WTI crude for September delivery traded at $107.30 a barrel at 7:12 GMT, up 0.33% on the day. Prices ranged between days high and low of $107.37 and $106.06 a barrel respectively. Light, sweet crude fell 0.83% on Friday as the U.S. Department of Labor released its controversial jobless statistics for July but WTI still closed the week 2.1% higher, the best performance since the week ending July 12.

Meanwhile on the ICE, Brent oil for September delivery rose to $109.24 per barrel at 7:11 GMT, up 0.26% on the day. Prices held in range between days high and low of $109.30 and $108.43 a barrel respectively. The European benchmark tumbled 0.43% on Friday but still snapped a two-week losing cycle and settled the week 1.7% higher.

Controversial data from last week

Oil prices swung between gains and losses last week as the U.S. economy provided controversial key economic data throughout the week. The Federal Reserve decided to keep its monetary easing program unchanged due to risks of disinflation, which would harm the economy, and the labor market still remaining fragile. Bank of England and the European Central Bank took the same decisions.

The U.S. Advance Gross Domestic Product rose to 1.7% in the second quarter, outperforming analysts’ expectations for a decrease to 1.0% from the preceding period’s downward revised reading of 1.1%.

The Institute for Supply Management’s U.S. factory index rose to a two-year high of 55.4, surpassing expectations for a jump to 52.0 from June’s 50.9 figure.

The U.S. Department of Labor reported on Thursday that the number of people who filed for initial unemployment payments decreased by 19 000 to 326 000 in the week ending July 27, beating analysts’ projections for remaining flat at 345 000 after the previous week’s reading was revised upward by 2 000 from 343 000.

Data also showed that Consumer Spending grew more than anticipated. Preliminary Personal Consumption Expenditures rose by 1.8% in the second quarter, surpassing expectations for a drop to 1.6% from the previous period’s 2.6% increase. Consumer spending accounts for as much as 70% of U.S. economic growth.

Meanwhile, positive China data that surpassed analysts’ expectation boosted demand prospects in the world’s second biggest consumer. China’s National Bureau of Statistics reported better-than-expected growth in factory activity. The Asian nation’s Purchasing Managers’ Index (PMI) rose to 50.3 last month, surpassing projections for a drop to 49.8 from June’s reading of 50.1. This was acknowledged as a positive sign for oil in the short-term, but analysts still expect contracting demand due to slowing growth as the Chinese government is trying to reshape the country’s economy.

However, the Department of Labors statistics on Friday erased some of oils previous gains. The government agency reported that the U.S. economy created a lot less jobs than projected. Non-Farm Payrolls climbed by 162 000, underperforming analysts’ expectations for 185 000. This was also below June’s reading of 188 000 jobs created, which was revised down by 7 000 from 195 000.

The negative payrolls reading offset other overall positive U.S. data that was released on Friday. The U.S. Department of Labor reported the Unemployment Rate fell to 7.4% from 7.6% in July, the lowest level since December 2008. Economists expected the indicator to drop by 0.1% to 7.5%.

Personal Income rose by 0.3%, mismatching forecasts for a 0.4% surge and May’s downward revised reading of 0.4%. On the other hand, Personal Spending exceeded the income increase of the average American and met expectations for a 0.5% surge, compared to June’s downward revised figure of 0.2%.

Jonathan Barratt, the chief executive officer of Barratt’s Bulletin in Sydney, said for Bloomberg: “The payroll numbers are not as strong as what people were and expecting and they’re now starting to question the economy. We’re also seeing an erosion of the Middle Eastern premium.” He predicted market players may buy WTI futures if prices fall to $102.50 a barrel.

China data and supply outage

Meanwhile, oil drew support on Monday as expanding services sector in China defied the economic slowdown as new business orders recovered from a multi-year low. On Saturday, an official survey showed Chinas non-manufacturing industry accelerated mainly due to increased positive sentiment from small companies. The governments non-manufacturing PMI rose to 54.1 last month from Junes 53.9.

Meanwhile, a separate private survey showed Chinas services industry remained unchanged in July, but still above the neutral level. The HSBC/Markit Purchasing Managers Index for the services sector stood at 51.3 in July, unchanged from June and above Aprils 20-month low of 51.1. However, expansion was limited by a fall in prices that companies charged for their services as demand was too weak to raise prices, while inflation kept increasing costs.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “China’s service sector has stabilised at a relatively low level of growth. But the profit margin continued to be squeezed given the divergence between input prices and prices charged indices. Without a sustained improvement of demand, services growth is likely to remain lackluster, putting downside pressures to employment growth.”

Natalie Rampono, an analyst at ANZ, said for Reuters: “Brent prices are reacting to macroeconomic headline data. The market may be seeing the latest PMI numbers as indicating that underlying demand could be picking up in China. But we at ANZ continue to remain cautious because the data out of China is mixed.”

Meanwhile, oil also picked up as persisting supply disruptions keep hurting supply prospects. All of Libyas terminals except one were shut in July because of protests. The country, which holds Africas biggest crude reserves, reduced its output to 800 000 barrels a day in July, down from 1.13 million in June. The Marsa el Hrega port reopened on August 1 but the Ras Lanuf, Marsa Brega, Zueitina and Es Sider still remained closed, Naji Mokhtar, the head of the parliamentary energy committee, said on August 3. Meanwhile, tribesmen blew up Yemens main oil export pipeline on Saturday.

However, Goldman Sachs expects a “quick resolution” to the disruption of Libya’s oil exports and maintained its three-, six-, and 12-month forecasts for Brent at $105 a barrel. Meanwhile, Irans newly elected President Hassan Rouhani called for negotiations with the United States. The countrys oil exports were reduced by more than half due to U.S. sanctions that aimed to force Iran quit its nuclear program.

“Given the change of tone in Iran and comments from the United States, we are seeing risk premiums surrounding the Middle East and Iran coming off.” said Jonathan Barratt.