WTI Oil Falls as Global Factory Data Signal Lower Demand

West Texas Intermediate crude dropped for a second day after manufacturing gauges in China and the U.S. declined, signaling reduced fuel demand.

Futures decreased 1.1 percent. The Institute for Supply Management’s U.S. factory index dropped more than forecast last month. China’s Purchasing Managers’ Index fell to a six-month low in January, a sign that government efforts to rein in credit will cool growth in the biggest oil-consuming nation after the U.S. WTI’s discount to Brent oil shrank to the narrowest level since October earlier today.

“Continuing worries about the global economy are putting pressure on prices,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “WTI was able to brush off the Chinese PMI earlier today but couldn’t ignore the weak ISM.”

WTI crude for March delivery fell $1.06 to settle at $96.43 a barrel on the New York Mercantile Exchange. It was the biggest decline since Jan. 8. The volume of all futures traded was 20 percent above the 100-day average at 3:22 p.m.

Brent for March settlement decreased 36 cents, or 0.3 percent, to end the session at $106.04 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since Nov. 12. The volume of all futures traded was 24 percent higher than the 100-day average.

The European benchmark’s premium to WTI was $9.61 a barrel, up from $8.91 at the close of trading on Jan. 31. Earlier today, it narrowed to as little at $8.09, the least since Oct. 18 on an intraday basis.

Slumping Orders

American factories expanded in January at the weakest pace in eight months as orders slumped. The Institute for Supply Management’s factory index decreased to 51.3 from 56.5 the prior month, the Tempe, Arizona-based group’s report showed today. The January figure was less than the most pessimistic forecast in a Bloomberg survey in which the median estimate was 56. Readings above 50 indicate expansion.

China’s manufacturing PMI was at 50.5 last month, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Feb. 1 in Beijing. The reading in December was at 51. A separate report released today on the non-manufacturing industry showed the PMI falling to 53.4 in January from 54.6 in December.

About $2 trillion has been erased from the value of equities worldwide this year as signs of a slowdown in China’s economy and cuts to a Federal Reserve stimulus program roiled emerging markets.

Equity Decline

The Standard & Poor’s 500 Index tumbled 2.2 percent, and the Dow Jones Industrial Average slipped 2 percent. The Nikkei 225 Stock Average entered a correction.

The southern leg of TransCanada Corp.’s (TRP) Keystone XL link began moving oil to the Gulf Coast of Texas from Cushing, Oklahoma, the delivery point for New York-traded crude, last month. The link was initially flowing at 288,000 barrels a day and will ramp up over the course of the year toward its 700,000-barrel capacity, executives said in a Jan. 22 press conference at the company’s headquarters in Calgary.

“Prices should be falling because additional barrels are flowing down to the Gulf Coast at a time when demand is falling,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “We’re about to enter the peak of the refinery turnaround season, so there will be a surplus of supply.”

Refinery Schedule

U.S. refinery utilization rates have dropped during the first quarter in eight of the last 10 years, data from the U.S. Energy Information Administration shows. Units are idled at the start of the year after preparing for the winter heating season in November and December.

An EIA report on Feb. 5 will probably show that U.S. crude inventories climbed by 2 million barrels last week, according to the median survey of eight analysts surveyed by Bloomberg. Stockpiles of gasoline rose while supplies of distillate fuel, a category that includes heating oil and diesel, declined in the week ended Jan. 31, according to the analysts.

WTI rose 0.9 percent last week as freezing U.S. weather boosted demand for heating fuel in the U.S. Money managers increased net-long positions, or wagers on rising prices, on futures and options by 13 percent in the week ended Jan. 28, the most since July, Commodity Futures Trading Commission data show.

Hedge Funds

Hedge funds and other money managers increased net bullish bets on Brent by the most in more than a month, according to data from ICE Futures Europe. Wagers that prices will rise, in futures and options combined, outnumbered short positions by 98,271 lots in the week ended Jan. 28, the exchange said in its weekly Commitments of Traders report.

Implied volatility for at-the-money WTI options expiring in March was 21.3 percent, down from 19 percent Jan. 31, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 563,352 contracts at 3:23 p.m. It totaled 558,549 contracts Jan. 31, 10 percent above than the three-month average. Open interest was 1.57 million contracts, the lowest level Jan. 31, 2013.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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