Oil drops as U.S. government shutdown begins, inventories outlook, OPEC output

West Texas Intermediate fell back below the $102 mark on Tuesday as the first U.S. government shutdown in 17 years threatened demand prospects in the worlds top consumer. Recovering Libyan production, improvement in the Iran – U.S. relations, boosted OPEC production and expected increase in U.S. crude inventories data further pressured prices.

On the New York Mercantile Exchange, WTI crude for delivery in November traded at $102.04 per barrel at 7:04 GMT, down 0.28% on the day. Prices held in a range between days high at $102.40 and low of $101.85, near yesterdays three-month low. Light, sweet crude fell by 0.5% and settled at $102.33 yesterday, extending its weekly decline to 0.8% after falling 6.9% in the last three five-day periods.

Meanwhile on the ICE, Brent futures for November settlement fell by 0.48% to $107.85 a barrel at 7:03 GMT. Prices varied between days high of $108.39 and low at $107.60, the weakest level since August 12. The European benchmark slipped 0.2% on Monday and extended its weekly decline to 0.6% following Tuesdays retreat.

Oil prices continued to retreat as the first U.S. government shutdown since 17 years began after lawmakers failed to pass a budget for the 2014 fiscal year. This could potentially put nearly 1 million state employees on unpaid leave and there were no further negotiations yet planned. 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.

Teoh Say Hwa, head of investment at Phillips Futures wrote in a note: “The shutdown of the government would result in the decrease in demand for oil in the worlds top oil consumer, pressuring prices, as hundreds of thousands of government employees would be forced to stay home without any pay.”

Meanwhile, both parties still disagree over raising the nations debt limit, which would render the U.S. Treasury Department unable to borrow on October 17. According to the Congressional Budget Office, the U.S. wont have enough money to pay all of its bills at some point between October 22 and October 31.

Mark Keenan, a director of commodities research and strategy at Societe Generale SA in Singapore, said for Bloomberg: “The debt ceiling issue remains an obstacle to any significant upside potential.”

Output, manufacturing data

Oil prices were also pressured yesterday after a private survey showed Chinas manufacturing sector expanded less than expected in September. The HSBC Purchasing Managers’ Index remained broadly unchanged from August’s 50.1 but underperformed both the preliminary reading and analysts’ expectations for a surge to 51.2. Nevertheless, this still marked an improvement after July’s 11-month low.

The Chinese National Bureau of Statistics will release its own report later today. 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.

Meanwhile, data may show that Germanys manufacturing activity expanded less in September than the previous month. The leading EU nations final manufacturing PMI should stand at 51.3, down from 51.8 in August. The Euro zones manufacturing sector is also expected to mark a smaller expansion with its reading hitting 51.1 in September from 51.4 in August. Meanwhile, Great Britains Manufacturing CIPS is expected to have risen to a six-month high of 57.5 in September, while in the U.S. the ISM Manufacturing may have declined to 55.1 from 55.7 in August.

Market players will also be keeping a close watch on this weeks U.S. crude inventories data, if the EIA publishes its report due to the partial government shutdown. According to a Bloomberg survey of analysts, the report is likely to show a 2.5 million barrels increase in U.S. crude stockpiles last week. Motor gasoline supplies probably fell by 700 000 barrels while distillate fuel inventories likely decreased by 1.38 million barrels.

The industry-funded American Petroleum Institute will release its own data later today. However, it is considered as less reliable than EIAs statistics as it is based on voluntary information from operators of refineries, pipelines and bulk terminals.

Also pressuring the market, a Bloomberg survey showed that OPECs production might have surged to a 10-month high in September after Saudi Arabias output hit a 24-year high. The groups pace rose by 43 000 barrels per day to an average 31.082 million bpd from a revised 31.039 million in August.

On Friday, a senior oil official said that Libya’s 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 country’s 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.

Syria, Iran

Putting further pressure on oil, 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 Syria’s 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.