Crude oil trading outlook: futures extend rout as China manufacturing slows, OPEC fight

Both West Texas Intermediate and Brent benchmark crudes fell to new multi-year lows as Chinas manufacturing sector contracted for the first time in seven months, while both US and OPEC producers were not seen scaling back output in a push to defend market share.

US crude for delivery in February traded at $55.22 per barrel at 8:22 GMT, down 1.85% on the day. Prices earlier fell to $55.09, the lowest since May 2009. The contract slid 3.13% on Monday to $56.26.

Meanwhile on the ICE, Brent for delivery in the same month fell by 2.09% to $59.93 per barrel, having earlier dropped to $59.80, the lowest since July 2009. The European crude benchmark slid 1.51% on Monday to $61.21, settling at a premium of $4.95 to its US counterpart. The gap narrowed to $4.71 on Tuesday.

Oil prices extended their rout amid speculation that US producers wont back down from a price war with the Organization of the Petroleum Exporting Countries, with US output already running at the highest in more than three decades. According to Goldman Sachs, US producers are benefiting as costs fall parallel to dropping prices. Data by the Energy Information Administration showed that US drillers pumped 9.12 million barrels of crude oil per day in the seven days through December 5th, the highest in weekly records dating back to January 1983.

Meanwhile, OPEC is also not seen stepping back after the group, responsible for 40% of global supply, resisted calls from smaller members to scale down output at its November 27th meeting in Vienna.

The market will balance itself out, said U.A.E. Energy Minister Suhail Al-Mazrouei, adding that OPEC would not consider holding an emergency meeting during the next three months and that the group could stand by its decision even if the market slides to $40.

According to a Bloomberg survey of analysts, Brent may fall by as much as 50% from this years peak before producers begin scaling back operations. According to Saxo Bank A/S, drilling activity in the US is showing some signs of slowing, but OPEC producers outside the Persian Gulf would feel the pressure first before US output is reduced. Goldman Sachs said in a report, cited by Bloomberg, that US drillers idled most rigs last week in two years, but that was almost only vertical machines and not the horizontal drillers used for shale production.

Moreover, the International Energy Agency said last week that global oil demand will increase by only 230 000 barrels a day in 2015, another downward revision, while supply outside OPEC is expected to climb by 1.3 million barrels per day to 57.8 million. Demand for OPEC crude is forecast to fall by 300 000 bpd next year to 28.9 million.

China manufacturing, emerging markets

Further weighing on oil prices, a preliminary private report showed that factory activity in China slowed for the first time in seven months in December, adding to a pile of downbeat data from the worlds second-biggest oil consumer.

Markit Economics reported that the HSBC Flash China Manufacturing PMI slid to 49.5 in December after stalling at 50.0 in November, hitting the lowest level in seven months and fueling expectations for additional monetary stimulus measures by the Peoples Bank of China. The output sub-index was at 49.7 from 49.6 in November, while new orders entered the contraction zone as domestic demand slowed considerably. Price indices also marked a sharp fall.

Hongbin Qu, Chief Economist, China & CoHead of Asian Economic Research at HSBC, commented in the report: “The manufacturing slowdown continues in December and points to a weak ending for 2014. The rising disinflationary pressures, which fundamentally reflect weak demand, warrant further monetary easing in the coming months.”

Weakening emerging market economies and their local currencies also pressured the market. Russias central bank raised its key interest rate by 6.5% to 17% on Tuesday in a push to lift the collapsed ruble, while Indias Reserve Bank has been intervening to support the rupee which has struggled with a widening trade deficit.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $56.89. In case the contract breaches the first resistance level at $58.37, it may rise to $60.47. Should the second key resistance be broken, the US benchmark may attempt to advance $61.95.

If the contract manages to breach the first key support $54.79, it might come to test $53.31. With this second key support broken, movement to the downside could continue to $51.21.

Meanwhile, February Brent’s central pivot point is projected at $61.70. The contract will see its first resistance level at $62.99. If breached, it may rise and test $64.78. In case the second key resistance is broken, the European crude benchmark may attempt to advance $66.07.

If Brent manages to penetrate the first key support at $59.91, it could continue down to test $58.62. With the second support broken, downside movement may extend to $56.83 per barrel.