WTI drops on Fed stimulus outlook, inventories, retail sales data support

West Texas Intermediate crude fell for a second day on Thursday after protocols from FOMCs October meeting revealed policy makers felt comfortable to scale back Feds monthly bond purchases in the next few months, if it was warranted by sustainable growth and the economic recovery proved resilient. Better-than-expected inventories data and retail sales released on Wednesday however put a floor under prices. Investors also awaited the conclusion of a third round of talks between Iran and major powers with expectations circling around for a preliminary deal. Ongoing protests in Libya continued to underpin the market, despite a recent resumption of operations at some terminals.

On the New York Mercantile Exchange, WTI crude for delivery in January traded at $93.62 per barrel at 8:07 GMT, down 0.25% on the day. Prices shifted in a days range between $93.83 and $93.47 a barrel. The American benchmark lost 0.3% on Wednesday and extended its weekly decline to over 0.1% on Thursday.

Meanwhile on the ICE, Brent futures for settlement in January stood at $107.82 a barrel at 8:07 GMT, down 0.22% on the day. Prices held in a narrow range between days high and low of $107.99 and $107.63 respectively. The European benchmark rose by 0.7% on Wednesday and was down 0.5% on weekly basis on Thursday.

Oil was pinned down after protocols from FOMCs October meeting showed the Federal Reserve might begin trimming its quantitative easing program “in the coming months”, if the economic recovery moves in the desired direction. Yesterdays Fed minutes showed that policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.”

Sam Coffin, an economist at UBS Securities LLC in New York, said for Bloomberg: “It sounds like they’re moving closer to tapering bond buying. There’s a lot more focus on their forward guidance and a lot of that is because if they’re moving closer to tapering they want to signal they’ll stay easy after the tapering has begun.”

Inventories data

Losses however remained in check after better-than-expected inventories data released by the EIA on Wednesday showed demand in the worlds biggest consumer is picking up. The Energy Information Administration reported that crude stockpiles rose by 0.4 million barrels to 388.5 million, the highest level since June, and were well above the upper limit of the average range for this time of the year. The gain however was smaller than a predicted 1 million barrel increase according to the median estimate of 11 analysts surveyed by Bloomberg.

Refineries operated at 88.6% of their operable capacity last week, down from 88.7% in the preceding period. U.S. crude oil imports averaged 7.9 million barrels per day, up by 19 000 barrels from a week earlier. Supplies at Cushing, Oklahoma, the biggest U.S. storage hub and delivery point for NYMEX-traded contracts, rose by 1.74 million barrels to the highest since July.

The report also showed that both motor gasoline and distillate fuel production decreased last week, averaging 9.3 and 4.9 million barrels per day, respectively. Motor gasoline inventories fell by 0.3 million barrels and matched analysts expectations, remaining above the upper limit of the average range for this time of the year. Distillate fuel stockpiles decreased by 4.8 million barrels last week, sharply exceeding projections for a drop of 280 000 barrels, and were near the lower limit of the average range. Total commercial petroleum inventories fell by 11.7 million barrels last week.

Oil also drew support after a gauge of U.S. consumer spending rose more than expected in October, signaling the 16-day government shutdown had little to no effect on the economy and suggesting upside momentum early in the fourth quarter.

The U.S. Department of Labor reported that retail sales rose by 0.4% last month, exceeding the median estimate of 86 analysts surveyed by Bloomberg for a minor 0.1% advance. September’s reading received and upward revision to 0.0% after being initially estimated at -0.1%.

Meanwhile, core retail sales, which exclude the volatile automobile market, jumped by 0.2% last month after September’s reading was revised down to 0.3% from initially calculated at 0.4%. Core retail sales correspond closely with the consumer spending component of gross domestic product (GDP). Their jump was largely based on increased demand for clothing, electronics, furniture and sporting goods.

China manufacturing

A smaller than expected expansion of Chinas manufacturing sector however put oil under pressure. A preliminary private report by HSBC and Markit Economics showed manufacturing activity in the worlds second largest consumer dropped to a two-month low in November due to weak new export orders and slowing pace of restocking activities.

The HSBC Flash China Manufacturing PMI fell to 50.4, down from Octobers final reading of 50.9 and below analysts expectations to post at 50.8. But the index remained above the neutral level of 50, which draws the line between expansion and contraction in the sector, for a fourth consecutive month.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented on the report: “China’s growth momentum softened a little in November, as the HSBC Flash China Manufacturing PMI moderated due to the weak new export orders and slowing pace of restocking activities. That said, this is still the second-highest PMI reading in seven months. The muted inflationary pressures should enable Beijing to keep policy relatively accommodative to support growth.”

Iran talks, Libyan output

Investors remained wary as Iranian diplomats and their counterparts from the five permanent members of the U.N. Security Council and Germany reconvened on Wednesday in Geneva for a third round of talks on the Islamic republics nuclear program. A senior U.S. official hinted on Friday a deal with Iran was “quite possible” this week but U.S. Secretary of State John Kerry said on Monday he had no specific expectations about reaching an accord, providing some support to prices.

Nevertheless, policy makers have said a temporary agreement on confidence-building steps could be reached this week, spurring speculations for a possible return of more than 1 million bpd of Iranian oil to the global market in the near future.

Victor Shum, vice-president of energy consultancy IHS Energy Insight, commented for CNBC: “Talks between Iran and world powers are erasing some geopolitical risk, but the situation in Libya is putting a floor under prices.”

Ongoing protests and violence which continued to keep most of Libyas export terminals and oilfields closed put a floor under prices despite a recent resumption of operations at some units.

Ibrahim Al Awami, the director of measurement for the Libyan oil ministry, said for Bloomberg on Wednesday that a tanker with capacity to carry around 600 000 barrels of oil was loading at the center-eastern Brega terminal and was scheduled to depart on Tuesday. This was the first loaded cargo in more than a month.

On November 19, a spokesman for the state-run National Oil Corp. said the western Mellitah port was reopened after members of the Amazigh minority closed the complex last week. The terminal became operational on Saturday after protests ended, allowing the second-largest oilfield in western Libya, El Feel, to resume production.