Oil weekly recap, January 27 – January 31

West Texas Intermediate crude fell on Friday after hitting a one-month high a day earlier on fears that a slowdown in emerging economies, led by China, will hurt global demand. The US benchmark however settled the week higher, supported by accelerating US growth and declining fuel supplies in the worlds top oil consumer, narrowing its discount to Brent crude. Prices on the two sides of the Atlantic settled the month lower, led by losses in the European benchmark.

On the New York Mercantile Exchange, WTI crude for delivery in March slid by 0.8% to $97.49 per barrel on Friday. Prices held in a daily range between $98.39, near Thursdays one-month high of $98.59, and $97.10 per barrel. US crude rose by 0.9% on Thursday and settled the week 0.9% higher, but the contract declined 0.9% on a monthly basis.

Meanwhile on the ICE, Brent futures for settlement in the same month fell by 1.4% on Friday to settle at $106.40 per barrel after holding in a daily range between $107.94 and $106.32. The European benchmark settled the week 1.5% lower and fell 4% in January, the worst monthly performance since September. Brents premium to its US counterpart fell to $8.91 per barrel, down from $9.72 on Thursday, the narrowest since mid-October.

US crude settled the week higher buoyed by signs of accelerating US growth and a decline in US fuel inventories, suggesting robust demand for petroleum products in the worlds top consumer. Prices however remained under pressure following FOMCs decision to cut Feds monthly bond purchases by another $10 billion, despite the outcome of the two-day meeting reflecting prospects of steady economic recovery.

The Energy Information Administration reported a much-larger-than-expected withdrawal in US distillate fuel inventories as demand rose to the highest in nearly six years. Distillate supplies, which include heating oil and diesel and are indicative for oil demand during the winter season, fell by 4.58 million barrels to 116.2 million in the seven days to January 24th and were well below the lower limit of the average range for this time of the year. The draw outstripped a projected decline of 2.55 million barrels, according to a weekly Bloomberg News survey of analysts.

Distillate demand jumped by 20% to 4.52 million barrels per day, the strongest since February 2008, as freezing weather across most of the densely-populated US areas stoked demand for heating oil.

Motor gasoline inventories fell by 819 000 barrels to 234.4 million last week, defying projections for a 1.6-million build, but were well above the average range.

Crude stockpiles rose by 6.4 million barrels to 357.6 million and were in the upper half of the average range. Analysts had expected a jump of 2.25 million barrels. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, increased to 41.8 million barrels, up from 41.6 a week earlier.

Refineries operated at 88.2% of their operable capacity, up from 86.5% in the preceding period. Both gasoline and distillate fuel production edged higher, averaging 9.2 million and 4.8 million barrels per day, respectively.

Also fanning positive sentiment for US crude demand, a preliminary reading showed that the US economy grew by 3.2% in the fourth quarter, matching analysts expectations. While this marked a slowdown from the third quarter’s 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 quarter’s 2.0% increase.

However, this came a day after the Federal Reserve decided to trim its quantitative easing program for a second consecutive month, 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 world’s top consumer, the upbeat US data strengthened the greenback, weighing on dollar-denominated commodities. The US dollar index, which measures the greenback’s performance against a basket of six major counterparts, rose by 0.3% on Friday to settle at 81.403. The March contract surged by nearly 0.8% on Thursday and settled the week 1% higher. Strengthening of the dollar makes commodities priced in it more expensive for holders of foreign currencies and limits their appeal as an alternative investment.

According to a Bloomberg survey, Nymex crude will fall next week with seventeen out of 31 analysts, or 55%, predicting a drop in prices, while eight were bullish, and six respondents remained neutral.

Emerging economies

However, the oil market, and mostly the Brent benchmark, was pressured by fears of stalling growth in emerging markets, dragging on crude demand. Emerging markets have benefited from cheap money supplied by the three rounds of Feds bond-purchasing program. However, with the two consecutive $10-billion cuts in the last two months, growth may stall. Meanwhile, expectations for moderating weather conditions in the US are projected to reduce demand for distillates, dragging on prices.

Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut, said, cited by Bloomberg: “Markets are down on worries about what’s going on in emerging economies. The oil market is overdue for a pullback after the recent rally.”

On Saturday, China’s National Bureau of Statistics reported that the nation’s manufacturing Purchasing Managers’ Index slid to 50.5 in January, matching a projected decline and trailing December’s reading of 51.0. The level of 50 represents a threshold separating expansion and contraction in the respective sector.

Analysts had raised concerns prior to the release of the report that the ongoing Lunar New Year holiday which began on January 31 probably slowed factory production. China’s markets are closed for the holiday from January 31 to February 6.

The report showed that Chinese factories suffered weaker export orders and minor growth in new orders. A gauge of output fell to a four-month low of 53.0 in January, down from 53.9 a month earlier, while the new-orders sub-index plunged to a six-month low of 50.9, down from 52.0 in December. Export orders, which track demand from abroad, fell at a faster pace and slid to 49.3, the weakest level since July.

The statistics agency’s data also suggested that jobs at factories shrank at a faster pace as well, with an employment sub-index dropping to 48.2, the slowest reading since February 2013.

Wang Tao, chief China economist at UBS AG in Hong Kong, commented, cited by Bloomberg: “The economy has lost some momentum. Credit growth slowed in the second half and that impact is being felt.”

Today’s report echoed a private survey released earlier in the week, which also showed factory output in the world’s second-biggest economy slowed to a six-month low. 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 in 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.

Earlier in the month, China’s National Bureau of Statistics reported that the Asian nation’s industrial production grew by 9.7% on an annual basis in December, the slowest since July, trailing analysts’ expectations for a drop to 9.8% from November’s 10% advance.

Meanwhile, the Asian economy grew by 1.8% in the fourth quarter, the government agency reported, underperforming projections that expansion would ease to 2.0% after posting at 2.2% in the three months through September. China’s economy expanded by 7.7% in 2013, matching the median estimate of analysts surveyed by Bloomberg. This was also the same expansion rate as in 2012, which however was the slowest since 1999.