Crude oil trading outlook: futures struggle as China manufacturing slows, strong dollar

Both West Texas Intermediate and Brent benchmark crudes were little changed on Monday, dragged by a strong dollar and new signs of a slowing Chinese economy. Analysts eyed factory data from the US.

US December crude traded 0.42% higher at $80.88 per barrel at 13:48 GMT, having shifted in a daily range of $80.98-$80.00. The contract slid for a second day on Friday and settled 0.71% lower at $80.54, falling for a fifth consecutive week. Prices dropped almost 12% last month, the biggest such decline since May 2012.

Meanwhile on the ICE, Brent for delivery in the same month stood at $86.00 per barrel, up 0.16% on the day. Prices held in a daily range of $86.22-$85.19 a barrel. The European crude benchmark fell 0.44% to $85.86 on Friday, settling the week 0.31% lower. Prices plunged 9.3% in October. Brent traded at a premium of $5.12 to its US counterpart, down from Fridays close at $5.32.

Oil prices remained under downward pressure after private data showed Chinas manufacturing sector expanded at a minor pace in October, albeit slightly better than September. HSBC, in collaboration with Markit Economics, reported that the HSBC China Manufacturing PMI registered at 50.4 last month, confirming a flash reading and outpacing Septembers dismal 50.2 expansion.

However, the report showed that output and new order growth weakened to the lowest in five months while new export business expanded at the slowest rate since June.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, commented: “Overall, the manufacturing sector continued to stabilize in October, however the sequential momentum likely weakened. The economy still shows clear signs of insufficient effective demand. We still see uncertainties, given the property downturn as well as the slow pace of global recovery, and expect further monetary and fiscal easing measures in the months ahead.”

Official data showed on Saturday that the Asian countrys factory output surprisingly slid to the lowest in five months as companies struggled with slowing orders and rising borrowing costs. The official Chinese Manufacturing PMI fell to 50.8, defying analysts projections to have inched up to 51.2 from 51.1 in September.

The official report is based on information primarily provided by larger, state-owned companies, while the private numbers are focused on smaller, private-owned manufacturers.

A separate official report showed on Monday that activity in Chinas services sector grew at the slowest pace since January as the cooling property sector dragged on demand. The respective non-manufacturing PMI declined to 53.8 in October from 54.0 in September.

OPEC output

The oil market remained under pressure after a Bloomberg survey showed last week that the Organization of the Petroleum Exporting Countries boosted its crude oil output in October, reflecting the group’s reluctance to lose market share and its ability to cope with lower prices.

OPEC pumped 30.974 million barrels of oil per day in October, Bloomberg reported, marking a 53 000-bpd increase from a month earlier, led by gains in Saudi Arabia, Iraq and Libya. September’s figure was revised down by 14 000 barrels per day to an average of 30.921 million barrels per day.

Additionally, OPEC Secretary General Abdullah al-Badri said last week he sees little change to the groups 2015 output target and that there is no need to panic at the recent slump in prices, reinforcing indications that member countries are in no hurry to cut output.

Strong dollar

A strong dollar continued to weigh on commodities across the board, including crude oil. The US dollar was at the highest in seven years after Bank of Japan unexpectedly boosted unprecedented stimulus last week. The central bank said it is targeting an 80 trillion yen ($726 billion) expansion in the monetary base, up from 60 to 70 trillion yen before.

Earlier in the week, the Federal Reserve ended its Quantitative Easing program and said it could raise interest rates faster than expected, given that the labor market improves at an accelerated pace and prices retain stability.

Policy makers said the US labor market has strengthened enough to digest the end of Fed’s bond purchases, citing solid jobs growth and a lower unemployment rate since their last meeting in September. FOMC members said that interest rates could be hiked sooner than otherwise, if Fed’s goals of full employment and stable prices are reached faster than expected, but stated that the opposite scenario can occur as well.

The US dollar index, which measures the greenback’s performance against a basket of six major trading peers, rose to the highest in more than four years. The December contract gained 0.30% to 87.275 by 13:42 GMT, having earlier risen to 87.540, the highest since June 2010. The US currency gauge rose 0.91% on Friday to 87.016.

The market was underpinned by accelerating manufacturing activity in Chicago, reported last week, as well as consumer confidence surging to the highest in seven years on the back of a solid labor market and declining gasoline prices. The relative Thomson Reuters/University of Michigan final index of sentiment rose to 86.9, the highest since July 2007, from 84.6 in the previous month. Analysts had projected a confirmation of the preliminary reading of 86.4.

Market players now awaited separate manufacturing reports by Markit Economics and the Institute for Supply Management to gauge demand prospects in the worlds top consumer, as well as Fridays all-important October jobs report.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate December futures’ central pivot point is at $80.45. In case the contract breaches the first resistance level at $81.36, it may rise to $82.17. Should the second key resistance be broken, the US benchmark may attempt to advance $83.08.

If the contract manages to breach the first key support $79.64, it might come to test $78.73. With this second key support broken, movement to the downside could continue to $77.92.

Meanwhile, December Brent’s central pivot point is projected at $85.57. The contract will see its first resistance level at $86.54. If breached, it may rise and test $87.22. In case the second key resistance is broken, the European crude benchmark may attempt to advance $88.19.

If Brent manages to penetrate the first key support at $84.89, it could continue down to test $83.92. With the second support broken, downside movement may extend to $83.24 per barrel.