WTI hits 3-month low on U.S. budget stalemate, fading Middle East tension (updated)

West Texas Intermediate fell to the lowest since July on the possibility for the first U.S. government shutdown in 17 years. Diplomatic progress between the U.S. and Iran and the adoption of the first resolution on the Syrian conflict by the U.N. Security Council further eroded oils geopolitical premium. Some downbeat data from China, the worlds second biggest consumer, also pressured the market.

On the New York Mercantile Exchange, WTI crude for delivery in November fell by 1.22% to $101.62 per barrel at 14:48 GMT. Prices held in range between days high of $102.38 and low at $101.06, the lowest since July 3. Light, sweet crude rose by 0.1% on Friday but settled the week 1.9% lower after shedding nearly 5% in the preceding two five-day periods.

Meanwhile on the ICE, Brent futures for November settlement traded at $107.78 a barrel at 14:49 GMT, down 0.82% on the day. Prices varied between days high of $108.26 and low at $107.23, the weakest level since August 12. The European benchmark fell by 0.7% on Friday and settled the week 0.7% lower after losing 5.8% in the preceding two.

Oil extended its losses into Monday amid ongoing uncertainty whether Congress will pass a budget for the 2014 fiscal year, beginning on October 1. If the bill gets rejected today, the government could be shut starting tomorrow. This could cut the U.S. fourth-quarter economic growth by as much as 1.4% due to the lost output from furloughed workers, while essential operations and dedicated funded programs will continue.

Timothy Radford, an analyst at investment firm Rivkin in Sydney, said for Reuters: “The key driver across commodities is the U.S. budget. A lot of risk assets have downward pressure placed on them unless we see some resolution in the United States.”

Iran, Syria

Also negative for oil prices, the first high-level talk in three decades between the presidents of the United States and Iran was held on Friday. President Barack Obama and recently elected President Hassan Rohani conducted a 15-minute telephone conversation via interpreters and expressed their mutual political will to rapidly solve the nuclear issue.

Meanwhile, easing tension between the U.S. and Syria also pressured the oil market after the U.N. Security Council voted 15-0 in favor of the resolution drafted by the U.S., U.K. and France to destroy Syrias chemical arsenal within a year. This dampened investors fears that an all-out military attack against Syria might spread the conflict over to the entire Middle East region, which accounted for more than a third of global oil output in the first quarter.

Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut, said for Bloomberg: “The combination of the prospect of lower economic growth here and an improving geopolitical situation have prices moving lower. A government shutdown has the potential of shaving as much as 1.4 percentage point off of U.S. growth. The Syrian risk premium has come out of the market and the Iranian one is dissipating.”

Meanwhile, a senior oil official said on Friday that Libyas oil production has recovered to as much as 580 000 barrels per day after western fields reopened this month but export terminals in the eastern remained shut by protesters. The African countrys output had fallen to less than a tenth of its pre-civil war level of 1.6 million bpd in the beginning of the month, while exports plunged to 80 000 barrels.

China manufacturing

Also pressuring the market, a private survey by HSBC and Markit Economics showed that the Chinese manufacturing sector expanded less in September than initially estimated earlier in the month. The HSBC Purchasing Managers’ Index remained broadly unchanged from Augusts 50.1 but underperformed both the preliminary reading and analysts expectations for a surge to 51.2. Nevertheless, this still marked and improvement after Julys 11-month low. Levels above the neutral level of 50 mark an expansion in the respective sector.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented: “The September HSBC China Manufacturing PMI edged up slightly from August. New orders remained flat from the previous month, while external demand improved. Manufacturers restocking process continued but remained relatively slow. Growth is bottoming out on Beijing’s mini-stimulus. We expect continuous policy efforts to sustain the recovery.”

According to the report, output “across the Chinese manufacturing sector expanded for the second successive month in September, though the rate of growth slowed to a fractional pace. Furthermore, growth of new work was unchanged from the previous month and only slight. Nonetheless, new business from overseas increased for the first time in six months (albeit marginally), with panellists citing stronger demand from client bases in Europe and the US.”

The Chinese National Bureau of Statistics will release its own report on Tuesday. According to analysts’ projections, the government agency will likely say that the country’s manufacturing sector activity rose to 51.5 in September, up from 51.0 in August.