WTI futures snap three days of gains on China demand worries, US inventories in focus

West Texas Intermediate crude fell on Thursday, putting an end to three days of gains, after worse-than-expected Chinese manufacturing data confirmed that an economic slowdown in the end of 2013 has extended into the new year. A private report showing that US crude inventories gained last week as refineries cut output also weighed on the market. Prices however continued to draw support after TransCanada Corp commissioned the southern segment of its Keystone XL pipeline, which should ease a bottleneck at Cushing, Oklahoma.

On the New York Mercantile Exchange, WTI crude for delivery in March fell by 0.09% to $96.64 per barrel by 8:01 GMT. Prices held in a narrow range between days high and low of $96.74 and $96.41 per barrel respectively. The US benchmark rose by 1.85% on Wednesday, the most since December 3rd, and is up nearly 2.5% on weekly basis.

Meanwhile on the ICE, Brent futures for delivery in the same month lost 0.25% to trade at $108.88 a barrel. Prices shifted in a daily range between $108.22 and $107.90. The European benchmark rose by 1.4% on Wednesday and is up nearly 1.6% on weekly basis. Brents premium to its US counterpart narrowed to $11.54, based on latest closing prices.

US crude jumped to the highest in three weeks on Wednesday after TransCanada Corp. began moving crude oil through its new pipeline from Cushing, Oklahoma to the Gulf Coast. The Gulf Coast line, also known as the southern portion of the Keystone XL pipeline, was initially transferring 288 000 barrels per day of US light, sweet oil from Cushing, Oklahoma to Nederland, Texas. It is expected to reach its 700 000-bpd capacity throughout the year, easing a bottleneck at Cushing, the biggest US storage hub and delivery point for NYMEX-traded contracts.

Inventories data

The market however was pressured after a private report showed US crude inventories rose more than expected last week. Crude supplies jumped by 4.86 million barrels in the seven days through January 17th, the industry-funded American Petroleum Institute reported, while gasoline inventories rose by 1.1 million. Distillate fuel stockpiles, including diesel and heating oil, fell by 2.29 million barrels.

API’s data however is deemed less popular than EIA’s statistics, as it is based on voluntary information from operators of pipelines, refineries and bulk terminals, while the government requires reports to be filed with the Energy Information Administration.

According to the median estimate of ten analysts surveyed by Bloomberg, the EIA will report a 1.75 million jump in gasoline stockpiles, a fourth weekly gain, while distillate fuel supplies are projected to have decreased by 500 000 barrels. US crude inventories are expected to have risen by around 0.7 million barrels.

China slowdown

Further weighing on sentiment, a preliminary private report showed that declining new orders led to the first contraction in Chinas manufacturing activity in six months, confirming that a mild slowdown late last year has extended into 2014. The HSBC Flash China Manufacturing PMI plunged to 49.6, defying analysts projections for a minor increase to 50.6 from Decembers final reading of 50.5. Meanwhile, the Flash China Manufacturing Output Index registered at 51.3 in January, down from 51.4 in December, hitting a three-month low.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented on the report: “The marginal contraction of January’s headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions. This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in 1H 2013.”

Ken Hasegawa, a commodity sales manager at Newedge Japan, said, cited by CNBC: “The data is a bit concerning. There was a big increase in U.S. crude oil stocks and now China PMI numbers are worse than expected. Thats making the market come off.”