Oil falls on QE outlook and China slowdown (Update)

Both WTI and Brent crude dropped near 2% on Thursday following an unexpected rise in Crude Oil Inventories and latest Quantitative Easing outlook. On Wednesday, Fed chairman, Ben Bernanke, announced the central banks monetary stimulus might come to an end within a year, if the economys recovery is in line with projections. In addition, partial scale back of bond purchases is expected to start during the second half of 2013.

On the New York Mercantile Exchange, WTI futures for August delivery lost 2.16% on the day at 9:13 GMT. Light, sweet crude traded at $96.37 a barrel after tumbling almost $2 earlier during the session. WTI ranged between days high and low at $98.21 and $96.23 a barrel respectively.

Meanwhile, Brent oil August futures were 1.85% lower on the day, standing at $104.16 per barrel at 9:14 GMT. The European benchmark moved between daily high and low at $105.81 and $104.05 respectively.

Lee Chen Hoay, an investment analyst at Phillip Futures said for Reuters: “There are a few factors weighing on oil today. The Federal Reserve has confirmed that they are likely to taper down asset purchases. Chinas latest PMI data is pointing to a slowdown in demand. As the worlds second-largest oil consumer, any slowdown in demand will weigh on prices.”

Ben Bernanke announced yesterday that the central bank won’t scale down its monetary easing program just yet, but that is highly possible to happen within the end of the year, provided the needed stable recovery signs. According to Bernanke, Fed’s moves are tied to what happens in the economy and the central bank has no fixed plan, sentiment points at reducing bond purchases. Bernanke said that if the economy continues to improve in line with Fed’s projections, it would be “appropriate to moderate the monthly pace of purchases later this year”, and end the program as the unemployment rate drops do 7%, which Fed expects to happen around mid-2014.

Meanwhile, Chinas economy showed further signs of slowdown. The preliminary HSCB PMI for China will be the lowest since September, if confirmed in the final reading on July 1. China is the worlds second biggest oil consumer, accounting for 11% of global consumption. After growing with the slowest pace in 13 years in 2012, Chinas growth forecast was further trimmed this year. The World Bank reduced its forecast for the nation’s economic growth to 7.7%, down from 8.4%. This comes after during the last week of May the IMF cut its economy growth forecast for China to 7.75%, down from 8%. The Organisation for Economic Co-operation and Development also trimmed its expectations to 7.8% from 8%.

Also, oil prices fell yesterday as the Energy Information Administrations weekly report showed Crude Oil Inventories rose more than expected. Crude reserves rose by 0.313 million barrels as of the week ending June 14. This is above the average range for this time of the year. Gasoline inventories rose by 183 000 barrels last week, also above the average. Distillate fuel inventories dropped by 500 000 barrels, thus remaining below the average range. Refineries operated at 89.3% of their capacity.

Final figures mismatched analysts’ expectations and differed from the American Petroleum Institute’s estimates. API’s separate report showed on Tuesday that that oil inventories shrank by 4.3 million barrels for the week ending June 14, compared to a 1 million decrease forecast. Gasoline stockpiles rose by 918 000 barrels and distillate-fuel reserves fell by 607 000 barrels.

However, oil prices keep drawing support from the civil war in Syria amid concern the conflict might spread to neighbor oil producing countries. A Reuters source at the last G8 meeting said that an international peace conference on Syria is unlikely to be held before August due to differences between Russia and the West.