WTI falls for a second day, China and QE outlook in focus

West Texas Intermediate fell for a second day, extending last weeks decline as market players await this weeks two day Fed policy meeting and the final reading of Chinas HSBC/Markit PMI. Crude was also pressured as Saudi Prince Alwaleed bin Talal said in an open letter that demand for oil by the group has declined and Saudi Arabia is pumping below capacity. Brent also fell.

On the New York Mercantile Exchange, WTI crude for September delivery traded at $104.20 a barrel at 7:17 GMT, down 0.48% on the day. Prices ranged between days high and low of $104.90 and $104.11 per barrel respectively. The American benchmark slipped 0.8% on Friday and settled 3.33% lower last week, snapping a four-week period of advances.

Meanwhile on the ICE, Brent oil for September delivery stood at $107.03 a barrel at 7:18 GMT, down 0.13% on the day. Futures held in range between $107.41 and $106.93 per barrel. Brent dipped 0.45% on Friday and settled the week 1.26% lower after plunging 0.55% the preceding one.

Oil continued its fall on Monday as Prince Alwaleed bin Talal told Oil Minister Ali Al-Naimi in an open letter that Saudi Arabia wont be able to increase daily output to 15 million barrels as planned as rising North American shale oil production is expected to increase self-sustainability and reduce U.S. crude imports. He also said there is a “clear and increasing decline” for OPEC oil and that the kingdom is now pumping below capacity as consumers reduce imports.

“We disagree with your excellency on what you said and we see that raising North American shale gas production is an inevitable threat,” said Alwaleed in the letter.

The latest EIA oil reserves report on Wednesday showed that despite gasoline and distillate fuel stockpiles confounded analysts’ expectations for an increase, U.S. oil output rose to 7.56 million barrels per day last week, the highest since December 1990. Meanwhile, crude reserves matched expectations for a 2.8 million barrels drop and did not exceed them like the previous three weeks.

Support

Oil losses were limited as renewed turmoil in Egypt spurred concern over Middle East oil supply, which accounted for 35 percent of global oil production in the first quarter of this year. The country is not a producer but controls the Suez Canal and Suez-Mediterranean Pipeline, through which more than 2.2 million barrels of oil per day gets transported to Europe.

According to the Health Ministry, at least 72 people were killed near a protest in Cairo, while eight died in Alexandria. This was the the highest number of people killed in a single incident after the Egyptian army ousted Islamist President Mohamed Mursi.

In Iraq, a bomb attack interrupted crude flow through the pipeline running from Iraqs Kirkuk oilfields to the Mediterranean port of Ceyhan in Turkey. Meanwhile, unrest in Libya supported oil prices as protests and explosions occurred in Benghazi on Sunday, a day after more than 1 000 prisoners escaped after a riot.

The North Seas Forties pipeline has cut production by 40 000 barrels per day due to maintenance works, curbing supply.

Yusuke Seta, a commodity sales manager at Newedge Japan, said for Reuters: “Oil will not go up much higher or fall below these levels, with Brent drawing support from the Forties pipeline issues and the U.S. benchmark under pressure from rising production in North Dakota. It will be a volatile week for prices with key data and policy meetings due this week.”

A weaker dollar also kept oil losses in check. The dollar index, which measures the greenbacks performers against six major trade partners, stood at 81.77 at 7:09 GMT, up 0.01% on the day. The September contract ranged between days high and low of 81.79 and 81.61 respectively, being lower most of the day. The U.S. currency gauge slipped 0.15% on Friday and settled last week 1.17% lower, a third consecutive weekly decline, as mixed U.S. data weighed on the dollar.

Market players are looking ahead into this weeks two-day Fed policy meeting to receive further information about when and how the central banks monetary easing program will be tapered.

Analysts at ANZ said in a note: “Fed Chairman Bernanke indicated at his semi-annual testimony that the central bank isnt yet ready to start winding back its asset purchases. Our base case remains that the Fed will begin tapering its asset purchase program in September.”

Investors will also be keeping a close eye on crucial data from the worlds second biggest consumer, China. The countrys HSBC/Markit PMI fell to 47.7, compared to June’s final reading of 48.2, the lowest in 11 months. Final reading will be released on Thursday, August 1. Readings below 50 indicate contraction in the respective sector.