WTI Poised for Weekly Drop as China Cuts Manufacturing Capacity

West Texas Intermediate was poised for the first weekly drop in more than a month amid rising crude output in the U.S. and speculation that China’s plans to cut excess manufacturing capacity will curb fuel demand.

Futures fell as much as 0.9 percent, heading for a weekly loss of 3.1 percent. China ordered more than 1,400 companies in 19 industries to cut excess production capacity this year, part of efforts to shift toward slower, more-sustainable economic growth. U.S. oil output surged to a 22-year high while refiners cut processing, government data showed on July 24. Prices will extend their decline next week, a Bloomberg News survey of analysts predicted.

“In the short term there may be a small drop in demand for raw materials,” said Guy Wolf, the global head of market analytics at Marex Spectron Group in London, who predicts Brent will struggle to surpass $120 a barrel this year. “But taking unproductive capacity out is a healthy process than in the medium-term supports growth.”

WTI for September delivery fell as much as 98 cents to $104.51 a barrel in electronic trading on the New York Mercantile Exchange and was at $104.46 as of 1:14 p.m. London time. The volume traded was 29 percent below the 100-day average.

Brent for September settlement slid 68 cents to $106.97 a barrel on the London-based ICE Futures Europe exchange. The European benchmark was at a premium of $2.45 to WTI, compared with $2.38 yesterday. Brent fell below the U.S. grade in intraday trading July 19 for the first time since August 2010.

Excess Capacity

“China’s manufacturing cuts are like a cold splash of water for the market, definitely rather bearish in the short-term,” said Michael Poulsen, an analyst at Global Risk Management in Middelfart, Denmark. “The immediate effect will mean lower demand, but in the long run, higher and smarter demand.”

Steel, ferroalloys, electrolytic aluminum, copper smelting, cement and paper are among areas affected, China’s Ministry of Industry and Information Technology said in a statement yesterday, in which it announced the first-batch target of this year to cut overcapacity.

WTI is set to snap the longest weekly rising streak since March. U.S. crude production climbed to 7.56 million barrels a day in the seven days ended July 19, the most since December 1990, according to the Energy Information Administration. Refiners reduced processing by half a percentage point to 92.3 percent of capacity after five weeks of increases, the Energy Department’s statistical unit said.

Losing Steam

“There’s a bit of steam coming out of the market,” said Jonathan Barratt, the chief executive officer of Barratt’s Bulletin in Sydney who predicts investors may buy WTI contracts if prices fall to about $104 a barrel. “The data out of the U.S. is mixed but on the whole it’s supportive.”

Futures will probably drop next week on concern that U.S. economic growth will slow and reduce fuel demand, a Bloomberg survey showed. Twenty-four of 38 analysts and traders, or 63 percent, forecast WTI will decrease through Aug. 2. Nine respondents, or 24 percent, predicted a gain and five projected no change. Last week, 58 percent forecast a decline.

WTI may extend losses as a so-called bearish engulfing pattern forms on the weekly candlestick chart, signaling the end of an uptrend, according to data compiled by Bloomberg. Prices slid after a similar technical formation in early April.

Tropical Storm Dorian became less organized and may weaken as it moves across open waters of the Atlantic, according to the U.S. National Hurricane Center.

Dorian, with maximum sustained winds of 50 miles (80 kilometers) per hour, was about 1,425 miles east of the northern Leeward Islands and moving west-northwest at 20 mph, according to a center advisory before 5 a.m. in New York.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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