WTI futures little changed as US fuel supplies fall, Fed tapering weighs

West Texas Intermediate crude marked a minor daily gain on Thursday after a government report showed US distillate fuel inventories fell more than expected in the seven days through January 24th, offsetting a larger-than-projected build in crude stockpiles. Feds decision on Wednesday to trim its monthly bond purchases by another $10 billion dampened demand for riskier assets, dragging on prices. Weak Chinese manufacturing data spurred concerns over demand prospects in the worlds second top consumer, but the oil complex drew support on supply disruption fears from the Middle East and North Africa.

On the New York Mercantile Exchange, WTI crude for settlement in March rose by 0.06% to $97.42 per barrel by 8:15 GMT. Prices shifted in a narrow daily range between $97.68 and $97.33 a barrel. The US benchmark lost 0.05% on Wednesday but extended its weekly advance to 0.8% on Thursday.

Meanwhile on the ICE, Brent futures for delivery in the same month fell by 0.06% to $107.78 a barrel after varying between days high and low of $108.00 and $107.67 a barrel. The European benchmark added 0.4% on Wednesday and was down 0.1% on weekly basis by Thursday. Brents premium to its US counterpart widened to $10.49 a barrel yesterday, up from $10 on Tuesday, based on closing prices.

US crude pared its biggest monthly decline for a January since 2010 after the Energy Information Administration reported a much-larger-than-expected withdrawal in US distillate fuel inventories as demand rose to the highest in nearly six years. Distillate supplies, which include heating oil and diesel and are indicative for oil demand during the winter season, fell by 4.58 million barrels to 116.2 million in the seven days to January 24th and were well below the lower limit of the average range for this time of the year. The draw outstripped a projected decline of 2.55 million barrels, according to a weekly Bloomberg News survey of analysts.

Distillate demand jumped by 20% to 4.52 million barrels per day, the strongest since February 2008, as freezing weather across most of the densely-populated US areas stoked demand for heating oil.

Motor gasoline inventories fell by 819 000 barrels to 234.4 million last week, defying projections for a 1.6-million build, but were well above the average range.

Crude stockpiles rose by 6.4 million barrels to 357.6 million and were in the upper half of the average range. Analysts had expected a jump of 2.25 million barrels. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, increased to 41.8 million barrels, up from 41.6 a week earlier.

Refineries operated at 88.2% of their operable capacity, up from 86.5% in the preceding period. Both gasoline and distillate fuel production edged higher, averaging 9.2 million and 4.8 million barrels per day, respectively.

Fed stimulus

Gains however remained limited after policy makers reached a unanimous decision to cut Feds monthly bond purchases for a second straight meeting by another $10 billion. This was the first meeting without dissent since June 2011 as policy makers were brought together by concern over Feds swelled balanced sheet which raised risks of asset bubbles.

The Federal Open Market Committee said it will further trim the central banks Quantitative Easing program based on improving labor market conditions and as economic growth accelerated in the recent quarters.

The Federal Reserve kept its tone that it will most likely hold its target interest rate near zero even after unemployment drops below 6.5%, especially if inflation remains well beneath policy makers long-term goal of 2%.

The U.S. dollar index, which measures the greenbacks performance against a basket of six major peers, traded at 80.805 at 7:55 GMT, up 0.28% on the day. The December contract shifted in a daily range between 80.810 and 80.635. The US currency gauge lost 0.1% on Wednesday but extended its weekly advance to 0.3% after it fell 0.9% in the preceding five-day period. Strengthening of the greenback makes commodities priced in it more expensive for holders of foreign currencies and limits their appeal as an alternative investment.

Weak China data

Also weighing on the market, a final reading of Chinas manufacturing activity in January confirmed the first contraction in the sector in six months. The HSBC China Manufacturing PMI slid to 49.5 this month, underperforming expectations for a drop to 49.6 forecast by the flash reading and well below Decembers 50.5.

This signaled the first deterioration of operating conditions in China’s manufacturing sector since July, while employment levels at Chinese manufacturers fell for the third consecutive month. Moreover, it was the quickest reduction of payroll numbers since March 2009. Production levels continued to increase in January, extending the current sequence of expansion to six months. However, the rate of growth eased to a marginal pace.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, commented on the report: “A soft start to Chinas manufacturing sectors in 2014 partly due to weaker new export orders and slower domestic business activities during January. Policy makers should pay attention to downside risks and preemptively fine-tune policy to steady the pace of growth if needed.”

The oil market, and mainly the Brent benchmark, however gained support on renewed concerns over supply disruptions in North Africa and the Middle East. In another incident reflecting the violent chaos the Libyan government has yet been unable to deal with, Libyas deputy prime minister survived unharmed an attempt on his life after gunmen fired on his car in Tripoli yesterday.

Meanwhile in the Middle East, Syria was reported to have given up less than 5% of its chemical weaponry and will miss next weeks deadline to hand its whole chemical arsenal abroad for destruction. The Syrian civil war and the recently probable US intervention had threatened to spill the conflict over neighboring major oil producers.