Crude oil futures trading outlook: WTI and Brent drop as China manufacturing growth slows, geopolitics

Both West Texas Intermediate and Brent crude benchmarks fell in early European trading on Thursday as a gauge of manufacturing activity in China signaled softening growth, fueling speculations of lower demand in the worlds second-biggest consumer. Mixed supply data by the EIA on Wednesday also failed to provide solid support but persisting geoplitical tensions in the Gaza Strip, Iraq and eastern Ukraine kept losses in check.

On the New York Mercantile Exchange, WTI crude for delivery in October stood at $93.17 per barrel at 7:38 GMT, down 0.30% on the day. Prices shifted in a daily range between $93.69 and $93.10 a barrel, close to Tuesdays 8-1/2-month low of $92.62. The US crude benchmark added 0.64% on Wednesday to settle at $93.45, snapping two days of losses.

Meanwhile on the ICE, Brent futures for settlement in the same month slid 0.46% to trade at $101.81 per barrel. The contract ranged between $102.29 and $101.70 a barrel, close to Tuesdays 14-month low of $101.07. The European crude benchmark added 0.71% on Wednesday to close the session at $102.28 a barrel. Brents premium to its US counterpart widened to $9.12 from Wednesdays close at $8.83.

Crude futures slid on Thursday after a preliminary reading provided by HSBC and Markit Economics showed that manufacturing activity growth in China slid in August to the lowest in three months. The Flash China Manufacturing PMI registered at 50.3 in August from Julys final reading of 51.7. At the same time, the Flash China Manufacturing Output Index slid to 51.3 from 52.8 in July, also a three-month low.

Output, new orders and new export orders increased, but at a slower rate, while employment in the sector decreased at a faster rate.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented on the report: “Todays data suggest that the economic recovery is still continuing but its momentum has slowed again. Therefore, industrial demand and investment activity growth will likely stay on a relatively subdued path. We think more policy support is needed to help consolidate the recovery. Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity.”

China is the worlds second biggest oil consumer and will account for 11% of global demand this year.

In Europe, Frances manufacturing sector contracted at a faster pace, data by Markit showed, with Frances preliminary manufacturing PMI sliding to 46.5 in August from 47.8 in July. If confirmed, this would be the lowest since May 2013. Analysts had expected a flat reading. Values below the threshold of 50 indicate a contraction in the sector.

Germanys manufacturing sector, however, outperformed economists projections, with the flash German manufacturing PMI registering at 52.0, compared to 52.4 in July, but beating predictions for a drop to 51.8. If confirmed, this would be the 14th straight month of expansion.

Analysts also eyed the upcoming release of retail sales in the UK, as well as initial jobless claims, manufacturing and housing data from the US later in the day.

US inventories

Yesterdays mixed US inventories data also failed to lift the oil market. The Energy Information Administration reported that total motor gasoline inventories rose for the first time in three weeks, having added 0.6 million barrels in the week through August 15th to 213.3 million, defying analysts’ expectations for a 1.4-million drop. Distillate fuel stockpiles, which include diesel and heating oil, fell by 1.0 million barrels to 121.5 million, compared to a projected 0.3-million decline.

US crude oil inventories fell by 4.5 million barrels last week to 362.5 million, beating analysts’ forecasts for a 1.75-million drop. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, rose to 20.2 million barrels from 18.4 a week earlier.

Refineries operated at 93.4% of their operable capacity, with gasoline production falling, while distillate fuel output rose, averaging 9.2 million and 4.9 million barrels per day, respectively.

Domestic crude production jumped to 8.577 million barrels of crude oil per day, up from 8.556 million last week and more than 1 million above year-ago levels. Imports stood at 7.459 million bpd, down from 7.846 million bpd a week earlier, while exports were flat at 295 000 barrels per day. Over the last four weeks, crude oil imports averaged about 7.7 million bpd, 4.2% below the same period a year earlier.

Geopolitics

Fighting in eastern Ukraine continued with high intensity on Wednesday, as government troops battle with pro-Russian separatists. Battles left at least 34 civilians dead on Tuesday alone, the BBC reported, bringing the estimated death toll to over 2 100, while a further 5 400 people were injured.

Meanwhile, the controversial Russian aid convoy was given a green light by Kiev, though it is still not moving in, as authorities in Kiev and Moscow await clearance by the International Committee of the Red Cross (ICRC). Both sides had asked the ICRC to mediate the humanitarian aid mission.

The Red Cross had still not been given security guarantees, officials said, which the ICRC require in order to liaise the Russian supplies with civilians in embattled zones in eastern Ukraine.

“Such guarantees for the ICRC should be provided, first of all, by the terrorists groups controlled by Russia, as well as by Russia itself,” Kiev said.

Elsewhere, Israeli Prime Minister Benjamin Netanyahu pledged to see the military campaign in Gaza through “with all means necessary” and until the safety of Israel is secured, as Hamas-fired rockets continued landing in Israel on Wednesday.

The remarks come after yesterday the Israeli military bombed a residence in Gaza, presumed to house Hamas’ military leader Mohammed Deif. The strike left his wife and young son dead, while he was said to have been elsewhere at the time, sparing his life.

Israel justified the strike on Wednesday, calling Mr Deif a “legitimate target”.

Yaakov Perry, Israel’s science minister and former security service chief, said he was “convinced that if there was intelligence that [Mr Deif] was not inside the home, then [Israel] would not have bombed it”.

Early on Thursday, Israel carried out more airstrikes on houses in Gaza, killing several high-ranking Hamas commanders, the Palestinian authority said.

The latest exchanges of fire between Hamas, which controls Gaza, and Israel come after peace talks brokered by Egypt crumbled. The principal demand by Israel that Gaza must demilitarize is dismissed by Hamas, while Israel refuses to ease the blockade on the Palestinian enclave and demands it has control over its borders in any case.

Meanwhile, Amnesty International and Human Rights Watch accused Israel of disallowing their members from entering Gaza to evaluate the plausibility of committed war crimes by both sides.

The conflict in Gaza has claimed more than 2 000 Palestinian lives, mostly civilians, and 66 Israelis since flaring back to life some six weeks ago.

Technical view

According to Binary Tribune’s daily analysis, West Texas Intermediate October futures’ central pivot point is at $93.25. In case the contract breaches the first resistance level at $93.78, it will probably continue up to test $94.10. Should the second key resistance be broken, the US benchmark will most likely attempt to advance to $94.63.

If the contract manages to breach the first key support at $92.93, it will probably continue to drop and test $92.40. With this second key support broken, movement to the downside will probably continue to $92.08.

Meanwhile, October Brent’s central pivot point is projected at $102.03. The contract will see its first resistance level at $102.62. If breached, it will probably rise and test $102.96. In case the second key resistance is broken, the European crude benchmark will probably attempt to advance to $103.55.

If Brent manages to penetrate the first key support at $101.69, it will likely continue down to test $101.10. With the second support broken, downside movement may extend to $100.76 per barrel.