Oil extends losses as U.S. government shutdown begins, manufacturing data

Both West Texas Intermediate and Brent benchmarks extended their losses on Tuesday as parts of the U.S. government closed following Congresss failure to pass a budget before yesterdays deadline, which threatened the U.S. economic recovery and oil demand. Recovering output by Libya eased supply concerns. Mixed manufacturing data from China to Europe and the U.S. provided some support.

On the New York Mercantile Exchange, WTI crude for delivery in November fell by 0.71% to $101.60 per barrel at 14:13 GMT. Prices bottomed at $101.51 per barrel, the lowest since July 4, while days high stood at $102.57 a barrel. Light, sweet crude fell by 0.5% and settled at $102.33 yesterday, extending its weekly decline to 1.2% after falling 6.9% in the last three five-day periods.

Meanwhile on the ICE, Brent futures for November settlement fell by 0.61% to $107.71 a barrel at 14:14 GMT. Prices held in range between days high at $108.40 and low of $107.52, the weakest level since August 12. The European benchmark slipped 0.2% on Monday and extended its weekly decline to over 0.6% following Tuesday’s retreat.

Oil prices continued to retreat as the first U.S. government shutdown since 17 years began after lawmakers failed to pass a budget for the 2014 fiscal year. This could potentially put nearly 1 million state employees on unpaid leave while there were no further negotiations planned yet. The shutdown may cut the U.S. fourth-quarter economic growth by as much as 1.4% due to the lost output from furloughed workers, while essential operations and dedicated funded programs will continue.

Meanwhile, both parties still disagree over raising the nation’s debt limit, which would render the U.S. Treasury Department unable to borrow on October 17. According to the Congressional Budget Office, the U.S. won’t have enough money to pay all of its bills at some point between October 22 and October 31.

Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, said for Bloomberg: “Now the guesswork about the duration of the shutdown is beginning because the longer it takes, the more the U.S. economic growth in the fourth quarter will suffer. At the moment, the main focus is trying to establish the floor in the market.”

OPEC

Putting further pressure on oil, the first high-level talk in three decades between the presidents of the United States and Iran was held on Friday. President Barack Obama and recently elected President Hassan Rohani conducted a 15-minute telephone conversation via interpreters and expressed their mutual political will to rapidly solve the nuclear issue.

The worlds six major powers will meet Iranian officials in Geneva on October 15-16 to discuss Irans nuclear intentions.

Another OPEC member, Libya, continued to recover its oil output after protesters shut oilfields and export terminals, which cut production to a tenth of its 1.6 million bpd pre-civil war capacity in the beginning of September. Libyan Oil Minister Abdulbari Al-Arusi said at at Oil & Money conference in London that the African country, which holds the continents biggest crude reserves, is currently producing 700 000 barrels of oil per day, up from last weeks 580 000, and that restoring production is a “political” issue, not a technical one.

Manufacturing data

Despite a worse than expected expansion of Chinas manufacturing sector, quarterly manufacturing growth in the Euro zone and a better-than-expected ISM Manufacturing index in the U.S. capped losses.

A government report showed that China’s manufacturing sector expanded less than expected in September, indicating fragile growth. The Asian country’s official manufacturing PMI slightly increased to 51.1 in September from 51.0 in August, underperforming analysts’ expectations for a surge to 51.5.

Yesterday, a private survey showed that the HSBC Purchasing Managers’ Index remained broadly unchanged from August’s 50.1 but underperformed both the preliminary reading and analysts’ expectations for a surge to 51.2. Nevertheless, this still marked an improvement after July’s 11-month low.

Meanwhile in Europe, Spain’s manufacturing PMI failed to meet expectations but remained in the expansion zone at 50.7, followed by Italy with a decline to 50.8 from 51.3 in August. France’s manufacturing activity marked an improvement but was still below the neutral level at 49.8, despite beating projections for a 49.5 reading. Germany’s manufacturing PMI was anticipated to retreat to 51.3 from 51.8 in August but mismatched projections and fell to 51.1, still marking an expansion in the sector however.

The overall Euro zone manufacturing activity also rose in September but trailed August’s pace. The single currency bloc’s manufacturing sector expanded for a third consecutive month and posted 51.1 in September following August’s 26-month high of 51.4. At 51.1, the seasonally adjusted Markit Eurozone Manufacturing PMI recorded a quarterly growth which put an end to the sector’s long running recession and signaled a modest rate of expansion. Recovery remained broad-based, with output rising in all nations except France and Greece.

A separate report showed that manufacturing activity in the U.K. was close to August’s two-and-a-half-year high. The Markit/CIPS Purchasing Manager’s Index remained in the expansion zone for a sixth month in a row at 56.7 in September, slightly underperforming the preceding month’s 57.2 and expectations for a surge to 57.5. The rate of job creation climbed to a 28-month peak.

Meanwhile in the U.S., the final Markit U.S. Manufacturing PMI met projections and the preliminary reading at 52.8 but retreated from Augusts 53.1. The reading indicated that manufacturing business conditions improved modestly over the month.

At the same time the Institute for Supply Management said that manufacturing activity in the U.S. defied analysts projections and rose to 56.2. Economists expected a drop to 55.1 from Augusts 55.7 reading.

Inventories data

Market players will also be keeping a close watch on this week’s U.S. crude inventories data. According to a Bloomberg survey of analysts, the report is likely to show a 2.5 million barrels increase in U.S. crude stockpiles last week. Motor gasoline supplies probably fell by 700 000 barrels while distillate fuel inventories likely decreased by 1.38 million barrels.

The industry-funded American Petroleum Institute will release its own data later today. However, it is considered as less reliable than EIA’s statistics as it is based on voluntary information from operators of refineries, pipelines and bulk terminals.