Oil Advances From One-Week Low on Chinese Manufacturing Outlook

Oil advanced from the lowest close in a week in New York after a Chinese manufacturing index signaled the world’s second-largest crude user may be pulling out of an economic slowdown.

Futures increased as much as 0.9 percent after slipping 4 percent yesterday. A preliminary reading for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics was at 49.5, signaling that Chinese manufacturing may contract at a slower pace in July. Oil also rose before a government report that may show U.S. inventories fell for a fifth week, the longest stretch in a year.

“China seems to be having a soft landing, and the U.S. economy is gradually recovering, so the fall in oil prices may not last,” said Christopher Bellew, a senior broker at Jefferies Bache Ltd. in London.

Oil for September delivery gained as much as 83 cents to $88.97 a barrel in electronic trading on the New York Mercantile Exchange and was at $88.55 at 10:06 a.m. London time. The contract dropped $3.69 to $88.14 yesterday, the lowest since July 13. Prices are down 10 percent this year.

Brent crude for September settlement advanced 54 cents to $103.80 a barrel on the London-based ICE Futures Europe exchange. The contract yesterday slipped 3.3 percent to $103.26. The European benchmark’s premium to West Texas Intermediate was at $15.31, compared with $15.12 yesterday.

Oil Supplies

Oil in New York has technical support at $86.59 a barrel, along the lower of two so-called leading span lines that define an “ichimoku cloud” on the daily chart, according to data compiled by Bloomberg. The cloud is an area where buy orders tend to be clustered. Last week’s price rise stalled near the upper boundary, signaling chart resistance.

China’s manufacturing may contract at a slower pace in July after two interest-rate cuts and a rebound in lending. If confirmed, the reading of 49.5 in the purchasing managers’ index would be the highest since February. The final number in June was 48.2.

“Crude markets are caught between a deteriorating demand picture and tightening supply fundamentals,” said Guy Wolf, a strategist at Marex Spectron Group Ltd., a London-based commodities broker. “The Chinese PMI was a surprise but likely to prove an aberration. Chinese attempts to stimulate the economy may be constrained by food price inflation over the next six months. Hard-landing risks are high.”

China’s state-run Cnooc Ltd. yesterday agreed to pay $15.1 billion in cash to acquire Nexen Inc. in the biggest overseas takeover by a Chinese company. Nexen is the operator and 43 percent owner of the Buzzard field, the biggest contributor to the Forties blend of North Sea crude. Forties is one of four grades that make up Dated Brent, the benchmark grade used to price more than half of the world’s oil.

Inventory Levels

Crude stockpiles probably fell 1.5 million barrels and gasoline inventories declined 500,000 barrels, according to the median estimate of seven analysts in a Bloomberg News survey before an Energy Department report tomorrow. U.S. refinery utilization probably fell 0.5 percentage point last week after dropping 0.7 percentage point the prior week, the survey shows.

The American Petroleum Institute will release separate inventory data today. The API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

“If the crude-inventory data comes in like the survey results, that would be supportive,” said Victor Shum, the managing director of IHS Consulting in Singapore. “The primary factor driving some buying now is the Chinese manufacturing data.”

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