Crude oil trading outlook: futures extend drop on oversupply, subdued manufacturing

West Texas Intermediate and Brent crude slid to the lowest in more than 5-1/2 years amid growing supplies from Iraq and Russia, while manufacturing activity figures from China and Europe pointed to weakness, exacerbating concerns of a global supply glut.

US crude for delivery in February slid 0.98% to $52.75 per barrel by 14:14 GMT, having earlier fallen to $52.03, the lowest since May 2009. Prices declined by 1.57% on Wednesday to $53.27.

Meanwhile on the ICE, Brent for delivery in the same month traded 2.04% lower at $56.16 per barrel after it fell to $55.48 earlier in the session, also the lowest since May 2009. The European benchmark crude shed 0.98% on Wednesday to settle at $57.33, a premium of $4.06 to its US counterpart. The gap narrowed to $3.41 on Friday.

Oil supplies from Russia and Iraq rose to the highest in decades in December, data from both countries governments showed, underscoring their determination to keep market share despite the current supply-demand imbalance. Russian oil output jumped 0.3% to 10.667 million barrels per day in December, a post-Soviet record, data by the Energy Ministry showed, while Iraq shipped 2.94 million bpd last month, the most in three decades, Oil Ministry spokesman Asim Jihad said.

Removing a minor support, a spokesman for the state-run National Oil Corp. said that the final two burning crude tanks were extinguished at Libyas largest oil port, Es Sider. The fires burst on December 25th when Islamist militants shot rockets at the export terminal in a second attempt to capture it.

Oil prices have halved since June amid speculations that weaker global economic growth will fail to soak rising global supply, led by US shale production, and as OPEC resisted calls to cut output in order to defend its market share. WTI fell 46% in 2014, the most in six years and the second-biggest decline since trading began in 1983.

Manufacturing activity

Worse-than-expected manufacturing data from Europe, coupled with almost non-existent growth in China sounded another negative note for oil demand starting 2015. Germanys manufacturing sector grew in December after contracting the previous month, with the corresponding PMI coming in at an expected 51.2, while Spain posted slower-than-projected growth, while Italys manufacturing activity shrank for a second month and France remained firmly in the contraction zone. The Eurozone as a whole saw its manufacturing gauge jump to 50.6 from 50.1 in November, but trailed projections for an increase to 50.8.

Government data showed yesterday that Chinas manufacturing sector grew at the slowest pace in 18 months, with the official PMI hitting 50.1 from 50.3 in November, while a private gauge earlier in the week slid to 49.6 from 50.0 the previous month.

Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen, said, cited by Bloomberg: “China PMI was more of the same while we are seeing weaker than expected PMI in Europe. This adds to the support for the dollar. So we are kicking off 2015 with a strong dollar and weak oil theme.”

US inventories

Oil prices drew some support earlier in the week as data by the Energy Information Administration showed that US crude inventories slid by 1.754 million barrels to 385.5 million in the week through December 26th, compared to projections to remain mostly unchanged. However, supplies at the Cushing, Oklahoma storage hub surged by 2 million barrels to 30.8 million, the most since February.

Domestic crude production inched lower to 9.121 million bpd, compared to 9.127 million a week earlier. Output was at the highest in more than three decades during the week ended December 12th. Imports fell by 1.231 million bpd to 7.061 million last week, while the four-week average of inbound shipments was at 7.531 million bpd, 1.7% higher compared to a year ago.

Refinery utilization rates jumped to 94.4% from 93.5% during the preceding period, with both gasoline and distillate fuel output rising to average 10.2 million and 5.3 million bpd, respectively. Motor gasoline inventories jumped by 2.951 million barrels to 229.0 million, exceeding projections for a 2.130-million jump, while distillate fuel stockpiles rose 1.874 million barrels to 125.7 million. Analysts had forecast an increase of 1.530 million.