Oil Falls on U.S., European Manufacturing Data

Oil fell as U.S. and euro-area manufacturing contracted in August, raising concern that slower economic growth will reduce demand.

Prices dropped 1.2 percent after the Institute for Supply Management’s U.S. factory index declined more than analysts forecast. Manufacturing slipped more than initially estimated in the euro area, London-based Markit Economics reported yesterday.

“We are seeing downward prices because of the poor economy,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The ISM number compounds the earlier manufacturing number from Europe, and overall, the economic data is weak.”

Oil for October delivery decreased $1.17 to settle at $95.30 a barrel on the New York Mercantile Exchange. Prices are down 3.6 percent this year.

Brent oil for October settlement fell $1.60, or 1.4 percent, to end the session at $114.18 a barrel on the London-based ICE Futures Europe exchange.

The U.S. manufacturing index decreased to 49.6 in August from 49.8 a month earlier, the Tempe, Arizona-based ISM said today. Economists in a Bloomberg survey projected an August reading of 50, which is the dividing line between expansion and contraction.

U.S. Manufacturing

The gauge averaged 55.2 in 2011 and 57.3 a year earlier. The group’s production index decreased to 47.2, the weakest level since May 2009.

“The ISM number is obviously sending oil lower,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “Oil traders have a good case to deleverage a little bit.”

The Standard & Poor’s 500 Index dropped as much as 0.7 percent and the Dow Jones Industrial Average slid as much as 0.9 percent.

“The decline in oil is well-calibrated to the decline in the S&P 500,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It’s not unusual lately for a 1-point move on the S&P to translate into a 10-cents-a-barrel change in oil. Today, that’s particularly strong in the case of Brent.”

A gauge of manufacturing in the 17-nation euro area based on a survey of purchasing managers was revised lower to 45.1 from the reading of 45.3 estimated earlier, Markit Economics said. It stood at 44 in July and has held for 13 months below 50, indicating contraction.

Moody’s Cut

Moody’s Investors Service lowered the outlook on the European Union’s Aaa long-term bond rating to negative from stable yesterday, reflecting the risks to Germany, France, the U.K. and the Netherlands that account for about 45 percent of the group’s budget revenue, according to a company statement.

In China, the largest oil-consuming country after the U.S., the Purchasing Managers Index shrank for the first time in nine months in August, a government survey showed Sept. 1.

The index dropped to 49.2 in August from 50.1 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said. The figure was below the estimates of 24 of the 25 analysts in a Bloomberg survey.

“China is definitely part of the same equation,” Ilczyszyn said. “While oil prices are weakening, traders are looking at China as well.”

‘Soft Fundamentals’

Oil prices will be pushed lower as a result of weakness in the global economy, according to a report by Morgan Stanley.

“Soft fundamentals and a challenged macro environment should continue to pressure oil prices,” Hussein Allidina, the bank’s head of commodities research in New York, said in the e-mailed report.

Oil gained earlier on speculation that central banks will take more steps to boost economic growth and as government data showed about 52 percent of U.S. Gulf of Mexico oil production remained shut in after Hurricane Isaac made landfall last week,

“Stimulus expectations are still driving the market,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “However, there is still a good chance that we’ll see Europe falling back to recession and that’s kind of weighing on the market. It seems like the recovery in the Gulf is a bit slow.”

In the Gulf, 710,866 barrels a day of production remained shut in, U.S. Bureau of Safety and Environmental Enforcement reported today.

Electronic trading volume on the Nymex was 441,342 contracts as of 3:02 p.m. in New York. Volume totaled 511,483 contracts on Aug. 31, 5.7 percent below the three-month average. Open interest was 1.53 million, the most since May 16.

There was no floor trading yesterday because of the U.S. Labor Day holiday. Transactions since the Aug. 31 close will be booked with today’s trades for settlement.

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