West Texas Intermediate oil fell for a third day as Chinese manufacturing contracted and speculation mounted that the Federal Reserve will cut bond purchases.
Futures dropped as much as 2.2 percent after a preliminary reading of China’s Purchasing Managers Index slipped to 49.6 for May, the lowest since October and less than forecast. Fed Chairman Ben S. Bernanke signaled yesterday that the central bank may reduce the monthly acquisition known as quantitative easing. A government report yesterday showed that U.S. gasoline supplies rose 3.02 million barrels last week.
“The Chinese manufacturing number was a huge blow,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “China is the swing oil demand center, much like Saudi Arabia is the swing producer, and what happens there is of outsize importance. We might see a correction because this will cut demand while supply grows.”
WTI crude for July delivery fell $1.49, or 1.6 percent, to $92.79 a barrel at 10:39 a.m. on the New York Mercantile Exchange. Futures dropped to $92.21, the lowest level since May 15. The volume of all contracts traded was 36 percent above the 100-day average.
Brent oil for July settlement declined $1.33, or 1.3 percent, to $101.27 a barrel on the ICE Futures Europe exchange. Volume for all contracts was 9 percent lower than the 100-day average. The European benchmark grade traded at a $8.48 premium to WTI.
The China manufacturing index for May released today by HSBC Holdings Plc (HSBA) and Markit Economics showed the first contraction in seven months. It’s below a median estimate of 50.4 in a Bloomberg survey of economists, which was also the final measure for April. A reading above 50 indicates expansion.
The Chinese economic figures also sent equities lower. The Standard & Poor’s 500 Index (SPX) dropped 0.8 percent and the Dow Jones Industrial Average 0.5 percent.
Bernanke said yesterday the Fed may taper its $85 billion a month of purchases if confident of a sustained improvement in the U.S. economy.
The Fed said May 1 it will keep buying bonds at the monthly pace of $85 billion, while standing ready to raise or lower purchases as conditions evolve. The Bank of Japan and Bank of England have also purchased assets to bolster economic growth while the European Central Bank cut interest rates to a record low on May 2.
“We’re down on concerns about the slowdown of stimulus by the Fed,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “The reason oil has been higher all year has been due to quantitative easing and other much measures. Now prices should drop to a level supported by demand.”
The drop in prices occurred after the oil market failed to breach key technical resistance at $97.17 a barrel, the high touched on May 6, Armstrong said.
“We’ve formed a double top at $97.17 and should now retrace at least to $90,” Armstrong said.
U.S. crude supplies slipped 338,000 barrels to 394.6 million last week, the Energy Information Administration said yesterday. A 1 million-barrel decline was forecast in Bloomberg survey. Stockpiles climbed to 395.5 million in the week ended May 3, the most since 1931, according to the EIA, the Energy Department’s statistical unit.
Crude supplies at Cushing, Oklahoma, the delivery point for WTI, rose 449,000 barrels to 50.2 million in the week ended May 17, yesterday’s EIA report showed.
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