WTI falls for a second day as China manufacturing slows, strong dollar weighs

West Texas Intermediate crude fell for a second day after it slid in January as slowing manufacturing activity in China raised concerns over softening demand in the worlds second-largest consumer. A stronger dollar also weighed on the oil complex, but prices were underpinned by supply fears after the occurrence of fresh violence in Iraq and Syria. Market players awaited the release of manufacturing gauges across Europe and the US to further assess global demand prospects.

On the New York Mercantile Exchange, WTI crude for delivery in March fell by 0.15% to $97.34 per barrel by 8:02 GMT. Prices shifted in a daily range between $97.54 and $96.78 a barrel. The US benchmark slid by 0.8% to $97.49 per barrel on Friday after hitting a one-month high on Thursday. Prices settled the week 0.9% higher, but the contract declined 0.9% on a monthly basis.

Meanwhile on the ICE, Brent futures for settlement in the same month were up 0.1% on the day at $106.51 a barrel after shifting in a daily range between $106.60 and $106.00. The European benchmark settled 1.5% lower last week and fell 4% in January, the worst monthly performance since September. Brent’s premium to its US counterpart fell to $8.91 per barrel on Friday, down from $9.72 on Thursday, the narrowest since mid-October.

The oil market was pressured by fears of stalling growth in emerging markets, dragging on crude demand. On Saturday, China’s National Bureau of Statistics reported that the nation’s manufacturing Purchasing Managers’ Index slid to 50.5 in January, matching a projected decline and trailing December’s reading of 51.0. The level of 50 represents a threshold separating expansion and contraction in the respective sector.

Analysts had raised concerns prior to the release of the report that the ongoing Lunar New Year holiday which began on January 31 probably slowed factory production. China’s markets are closed for the holiday from January 31 to February 6.

The report showed that Chinese factories suffered weaker export orders and minor growth in new orders. A gauge of output fell to a four-month low of 53.0 in January, down from 53.9 a month earlier, while the new-orders sub-index plunged to a six-month low of 50.9, down from 52.0 in December. Export orders, which track demand from abroad, fell at a faster pace and slid to 49.3, the weakest level since July.

The statistics agency’s data also suggested that jobs at factories shrank at a faster pace as well, with an employment sub-index dropping to 48.2, the slowest reading since February 2013.

Ric Spooner, a chief analyst at CMC Markets in Sydney, said, cited by Bloomberg: “Oil is joining other commodities in being a bit nervous about softer figures in China. Although the PMI figures were in line with expectations, when you got down into the detail, it included a weaker manufacturing labor market.”

Saturdays report echoed a private survey released earlier in the week, which also showed factory output in the world’s second-biggest economy slowed to a six-month low. 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 December’s 50.5.

Strong dollar

Emerging markets have benefited from cheap money supplied by the three rounds of Fed’s Quantitative Easing program. However, with the two consecutive $10-billion cuts in the last two months, growth may stall. Meanwhile, expectations for moderating weather conditions in the US are projected to reduce demand for distillates, dragging on prices.

Last week, policy makers reached a unanimous decision to cut Fed’s 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 Fed’s swelled balanced sheet which raised risks of asset bubbles.

The Federal Open Market Committee said it will further trim the central bank’s Quantitative Easing program based on improving labor market conditions and as economic growth accelerated in the recent quarters, which strengthened the dollar.

Also lifting the greenback, a preliminary reading showed that the US economy grew by 3.2% in the fourth quarter, matching analysts’ expectations. While this marked a slowdown from the third quarter’s 4.1% growth pace, it was stronger than what economists had expected earlier in the year. Personal Consumption Expenditures jumped by 3.3% in the three months through December, trailing projections for a 3.7% jump but outstripping the previous quarter’s 2.0% increase. Key labor numbers are due later in the week.

The US dollar index, which measures the greenback’s performance against a basket of six major counterparts, traded at 81.38 at 7:48 GMT, slightly up on the day. Prices shifted between days high and low of 81.42 and 81.33 respectively. The March contract settled last week 1% higher after holding near a two-month high. Strengthening of the dollar makes commodities priced in it more expensive for holders of foreign currencies and limits their appeal as an alternative investment.

Market players are awaiting Januarys manufacturing numbers from the Euro zone and the US Markit PMI and ISM Manufacturing index later in the day to further gauge global demand prospects. Manufacturing growth in the single-currency bloc is projected to have remained unchanged at 53.9, while the Institute for Supply Management is expected to report a slightly slower expansion in the US.

Iraq, Syria

Investors were also keeping a close watch on the unwinding turmoil in Iraq. After Sunni Muslim anti-government fighters, including al Qaeda-linked rebels, overran the city of Fallujah on January 1st, the Iraqi army prepared for a ground assault to retake the city after intensifying its bombing on Sunday.

Nationwide output fell to 2.23 million barrels per day in January from 2.34 million in December due to attacks on a pipeline transporting crude from the northern Kirkuk oilfields to Turkey, Oil Minister Abdul Kareem Luaibi said last week. Bad weather conditions disrupting shipping from the countrys southern export terminals also contributed to the slowdown, Luaibi said.

Meanwhile in Syria, at least 83 people were killed after military helicopters bombarded the northern city of Aleppo. The ongoing Syrian civil war and the until recently highly-probable US military intervention have supported oil prices amid fears that the conflict might spread over to neighboring major oil producers, if it were to became a multi-national war scene.