Crude oil futures decline on downbeat China data

Both West Texas Intermediate and Brent crude benchmarks fell on Monday as overnight data showed a third consecutive monthly contraction in Chinas factory production, spurring demand concerns from the worlds second biggest oil consumer. A strong dollar kept the commodities markets pressured, while investors eyed upcoming diplomatic talks that are to determine the Wests reaction to Russia annexing Crimea.

On the New York Mercantile Exchange, WTI crude for delivery in May fell by 0.07% to $99.39 by 7:48 GMT. Prices held in a range between days high and low of $99.60 and $99.05 a barrel. Prices jumped to a 1-1/2-week high of $100.25 on Friday and settled at $99.46 per barrel, closing the week 0.9% higher.

Meanwhile on the ICE, Brent futures for settlement in the same month traded at $106.79 per barrel, down 0.12% on the day. Prices varied in a daily range between $106.45 and $107.09 a barrel. The European crude benchmark rose to $106.92 on Friday but settled the week 1.2% lower, a fourth consecutive weekly decline. Brent traded at a premium of $7.40 to its US counterpart, down from Fridays settlement at $7.46. Prices have fallen 3.8% in 2014.

The oil market was pressured early on Monday after a preliminary gauge of manufacturing activity in China showed a third straight monthly contraction in the sector. The HSBC Flash China Manufacturing PMI, prepared by HSBC and Markit Economics, fell to an eight-month low of 48.1 in March from Februarys final reading of 48.5. The figure also fell short of analysts expectations for a jump to 48.7.

Meanwhile, Chinas Flash China Manufacturing Output Index slid to 47.3 this month from 48.8 in February, an eighteen-month low. The negative readings, coupled with previous weak data points released earlier in the month, spurred fears the worlds second-biggest economy and oil consumer may not be able to meet Premier Li Keqiangs 7.5% annual growth rate target.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented on the report: “The HSBC Flash China Manufacturing PMI reading for March suggests that China’s growth momentum continued to slow down. Weakness is broadly-based with domestic demand softening further. We expect Beijing to launch a series of policy measures to stabilize growth. Likely options include lowering entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower.”

US data, inventories

Better-than-expected readings from the US last week aided the market. The number of people who filed for initial unemployment benefits in the week ended March 15th was close to a three-month low. Initial jobless claims rose to 320 000, beating projections for a jump to 322 000 from the preceding week’s 315 000.

Meanwhile, manufacturing activity in Philadelphia rebounded in March, with the Philadelphia FED Index registering at 9.0, which outstripped analysts’ expectations for a jump to 3.2 from February’s decline to -6.3. However, sales of previously owned homes matched projections for a drop a 4.6-million annualized rate in February, the lowest since July 2012.

An overall stronger US dollar that gained after policy makers further cut Feds unprecedented bond-buying program pressured the oil market, but it also fanned positive sentiment for the US economys recovery state, and demand prospects.

Piling US crude inventories kept pressuring the oil market. Nationwide supplies of crude oil rose for a ninth straight week in the seven days through March 14th and hit 375.9 million barrels. US crude production jumped by 33 000 barrels per day to hit 8.22 million bpd, while refinery utilization rates fell to 85.6%, the lowest since April.

According to data by the U.S. Commodity Futures Trading Commission, hedge funds reduced their net-long positions on WTI crude by 25 775 futures and options combined in the week ended March 18th, the most in almost nine months.

The US benchmark crude is expected to drop this week amid ample supplies, according to a Bloomberg survey of analysts conducted last week. Eighteen out of 39 participants polled, or 46%, expected prices to drop through March 28th.

Market players will also be keeping a close watch on developments in the diplomatic relations between Russia and the West. WTI rose back to positive weekly territory on Friday after President Vladimir Putin signed legislation needed to annex Crimea and its port of Sevastopol. This happened after Washington expanded its list of individuals to be sanctioned due to their close ties to President Vladimir Putin. Broadening of the sanctions to more than 20 prominent Russians marked an escalation of diplomatic pressure against President Putin for Moscow’s intervention in Ukraine.

Leaders of the G7 nations will hold talks on the sidelines of a nuclear summit in The Hague today regarding their response to Moscows latest actions. According to NATO, Russia had amassed a very sizeable force on its Ukrainian border.

A further drop in supplies from Libya, holder of Africas biggest crude reserves, also supported the oil complex, particularly the Brent benchmark. The state-run National Oil Corporation said nationwide output has fallen to less than 250 000 bpd, down from last summers production of 1.4 million barrels per day.