WTI futures ease off 1-month high, strong dollar weighs

West Texas Intermediate crude fell during early European trading hours as traders locked in gains after prices rose to a one-month high yesterday. Robust US economic growth in the fourth quarter boosted demand prospects, but a stronger dollar pressured the commodities market. Signs of slowing Chinese economy and falling oil demand fanned negative sentiment, but concerns over supply in North Africa and the Middle East kept a floor under prices.

On the New York Mercantile Exchange, WTI crude for settlement in March fell by 0.55% to $97.69 per barrel by 8:23 GMT. Prices varied in a daily range between $98.21 and $97.64 per barrel. The US benchmark hit a one-month high on Thursday and settled at $98.23, the highest close since December 31. Prices are up nearly 0.9% this week but are down 0.6% on monthly basis.

Meanwhile on the ICE, Brent futures for delivery in the same month slid by 0.30% to $107.63 per barrel. Prices held between days high and low of $108.02 and $107.59 per barrel respectively. The European benchmark added 0.1% on Thursday but is down 0.3% on weekly basis and has lost 2.9% so far this month. Brents premium to its US counterpart narrowed to $9.72 a barrel yesterday, down from $10.49 a day earlier, based on closing prices.

US crude jumped to the highest in a month on Thursday after strong US GDP numbers in the fourth quarter fanned positive sentiment for the top oil consumers economic recovery and boosted demand prospects. The fourth quarter Advance Gross Domestic Product matched analysts expectations by rising 3.2%. While this marked a slowdown from the third quarters 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 quarters 2.0% increase.

Yesterdays data came a day after policy makers reached a unanimous decision to cut Feds monthly bond purchases by another $10 billion to $65 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.

The Federal Reserve kept its tone that it will most likely hold its target interest rate near zero even after unemployment drops below 6.5%, especially if inflation remains well beneath policy makers’ long-term goal of 2%.

Despite brightening demand prospects in the worlds top consumer, the upbeat US data strengthened the greenback, weighing on dollar-denominated commodities. The US dollar index, which measures the greenbacks performance against a basket of six major counterparts, traded at 81.19 at 8:01 GMT, mostly unchanged on the day. The March contract surged by nearly 0.8% on Thursday and is up 0.8% on weekly basis. Strengthening of the dollar makes commodities priced in it more expensive for holders of foreign currencies and limits their appeal as an alternative investment.

Ben Le Brun, a market analyst at OptionsXpress in Sydney, said for CNBC: “Oil has been marching to the beat of its own drum, but at the end of the day it is priced in the dollar. So if we see some solid strength in the dollar, it will weigh on oil and other commodity prices.”

China slowdown

A slowing Chinese economy and weakening oil demand pressured the market. A final private reading of China’s manufacturing activity in January confirmed the first contraction in the sector in six months. 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.

This signaled the first deterioration of operating conditions in China’s manufacturing sector since July, while employment levels at Chinese manufacturers fell for the third consecutive month. Moreover, it was the quickest reduction of payroll numbers since March 2009. Production levels continued to increase in January, extending the current sequence of expansion to six months. However, the rate of growth eased to a marginal pace. A separate report earlier in the month showed Chinas fuel demand rose at the slowest pace in more than two decades in 2013.

A government report, due for release tomorrow, is expected to show slowing growth compared to a month earlier. The National Bureau of Statistics will likely report Chinas Purchasing Managers’ Index fell to 50.5 in January, down from 51.0 in December.

Supply concerns from producers in the Middle East and North Africa however kept the oil complex underpinned. Six suicide bombers took hostages and killed at least 24 people including themselves in an Iraqi ministry building on Thursday, security officials said.

Meanwhile, Syria was reported to have given up less than 5% of its chemical weaponry and will miss next week’s deadline to hand its whole chemical arsenal abroad for destruction. A first round of peace talks on Syria concludes on Friday without any decision being taken. The meeting mediator, the U.N., expressed frustration that there wasnt an agreement reached for an aid convoy to enter the besieged city of Homs. The Syrian civil war and the until recently probable US intervention had threatened to spill the conflict over neighboring major oil producers. Meanwhile in Libya, eastern export terminals remained under rebel control.