Crude oil trading outlook: futures drop on China demand fears, Saudi output

West Texas Intermediate and Brent crude pared overnight gains on Tuesday as Chinas manufacturing activity contracted in March, while a report showed Saudi Arabia was pumping at a near all-time high of around 10 million barrels of crude oil per day.

US crude for delivery in May traded 1.22% lower at $46.87 per barrel at 7:58 GMT, shifting in a daily range of $47.51-$46.75. The contract gained 1.9% on Monday to $47.45, having earlier risen to $47.61, the highest since March 13th.

Meanwhile on the ICE, Brent for settlement in the same month was down 0.82% at $55.46 a barrel, ranging between $55.92 and $55.38 for the day. The contract rose 1.1% yesterday to $55.92, settling at a premium of $8.47 to its US counterpart. The gap was at $8.59 on Tuesday.

Oil prices saw renewed downward pressure on Tuesday after an overnight report showed that leading OPEC producer Saudi Arabia was pumping about 10 million barrels per day of crude, near an all-time record, adding to oversupply concerns as US output reached a new multi-decade high in the week ended March 13th.

“We expect crude prices to be pressured once again by the weight of some 2 million barrels per day of oversupply in Q2 2015,” energy consultancy FGE said in a note, cited by CNBC.

Saudi Arabias Oil Minister Ali al-Naimi said on Sunday he was optimistic about the market and that his country would not reduce output to normalize prices unilaterally, calling for non-OPEC cooperation on any production cuts. The kingdom is able to meet demand from any customer, al-Naimi said.

Investors have been eyeing OPEC, and particularly Saudi Arabia’s reaction to a slump in oil prices which began in June as a result of weaker global demand growth and the shale oil boom driving US output to the highest in more than three decades. The leading OPEC producer steered the group into retaining its 30-million-bpd production target at a November 27th meeting, denying any obligation to one-sidedly cut production and support the market so that all non-OPEC producers are benefited.

“We tried, we held meetings and we did not succeed because countries outside OPEC were insisting that OPEC carry the burden and we refuse that OPEC bears the responsibility,” al-Naimi said. He added that everybody is supposed to participate in a cut to improve prices, since 70% of global supply comes from non-OPEC members.

China slowdown

Concerns over slowing growth in China added to market pressure as preliminary private data showed that activity in Chinas sector of manufacturing contracted in March to an 11-month low. The HSBC Flash China Manufacturing PMI fell to 49.2 from 50.7 in February, compared to projections for 50.6. The final reading is due out on April 1st.

Annabel Fiddes, Economist at Markit Economics commented: “A renewed fall in total new business contributed to a weaker expansion of output, while companies continued to trim their workforce numbers. Meanwhile, manufacturing companies continued to benefit from falling input costs, stemming from the recent global oil price decline. However, relatively muted client demand has led firms to pass on savings in a bid to boost new work, and cut their selling prices at a similarly sharp rate.”

Factory activity in Japan remained above the contraction/expansion threshold but growth slowed to the weakest in the current 10-month sequence of expansion. The Markit Flash Japan Manufacturing PMI slid to 50.4 from 51.6 in February, defying projections for a jump to 52.1, while production growth was the slowest since October as the Flash Manufacturing Output Index slid to 52.0 from 53.5 in February.

Limited support has been drawn after Baker Hughes Inc. reported on Friday that US oil producers idled another 41 oil rigs last week, a fifteenth straight decline that brought their total count to 825, the lowest in over four years. However, the drop was smaller than those in the previous two weeks and the average 59 for February, showing signs of slowing down.

Although oil explorers have idled 750 sites since early-December, US crude output remains at a peak as the biggest shale wells continue to operate. Some analysts expect the idling of rigs to effectively curb US production in the second half of the year.

Government data tomorrow is expected to show that US crude stockpiles rose by 5 million barrels in the week ended March 20th to a new record, while gasoline and distillate fuel inventories likely declined, by 1.95 and 1.38 million barrels, respectively. Industry group the American Petroleum Institute will release its separate supply data at 20:30 GMT on Tuesday.

A weaker dollar relieved some of the pressure weighing on dollar-denominated commodities. A gauge of the greenbacks performance against a basket of six major currencies eased from recent 12-year highs after the Federal Reserve revised down its interest rate estimates for the year, and the euro gained ground versus the dollar amid signs of easing of tension between Greece and its creditors.

Pivot points

According to Binary Tribune’s daily analysis, WTI May futures’ central pivot point is at $46.80. In case the contract breaches the first resistance level at $48.26, it may rise to $49.08. Should the second key resistance be broken, the US benchmark may attempt to advance $50.54.

If the contract manages to breach the first key support at $45.98, it might come to test $44.52. With this second key support broken, movement to the downside could continue to $43.70.

Meanwhile, May Brent’s central pivot point is projected at $55.41. The contract will see its first resistance level at $56.70. If breached, it may rise and test $57.48. In case the second key resistance is broken, the European crude benchmark may attempt to advance $58.77.

If Brent penetrates the first key support at $54.63, it could continue down to test $53.34. With the second support broken, downside movement may extend to $52.56 per barrel.