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WTI Crude Declines as Chinese Manufacturing Shrinks

May 23 (Bloomberg) -- West Texas Intermediate oil slipped as Chinese manufacturing contracted and speculation mounted that the Federal Reserve will cut bond purchases. Futures pared most of the loss in late trading as the dollar dropped.

Crude fell for a third day after China’s Purchasing Managers Index was reported at 49.6 for May, the lowest level 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. Commodities and equities slid in early trading after the Nikkei 225 Stock Average fell the most in two years.

“There was a general risk-off trade in all of the markets early today,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “It looks like the equities and oil have both found a new bottom to trade off of.”

WTI crude for July delivery fell 3 cents to settle at $94.25 a barrel on the New York Mercantile Exchange. Futures dropped to a one-week low of $92.21 in intraday trading. The volume of all contracts traded was 14 percent above the 100-day average at 2:45 p.m.

Brent oil for July settlement declined 16 cents to $102.44 a barrel on the ICE Futures Europe exchange. Volume for all contracts was 18 percent lower than the 100-day average. The European benchmark grade traded at a $8.19 premium to WTI.

Prices rebounded from a 2.2 percent drop as the Dollar Index, which tracks the currency against six others, fell after reaching a 34-month high today. It slipped 0.7 percent to 83.738, the biggest decline since April 16. A falling dollar increases the appeal of raw materials priced in the currency.

Manufacturing Index

Oil slipped earlier after the China manufacturing index for May released today by HSBC Holdings Plc 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 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.”

Oil’s rebound also tracked movement in equities. The Standard & Poor’s 500 Index was little changed at 2:54 p.m. after dropping 1.2 percent on the Nikkei 225’s 7.3 percent plunge, the largest since the Fukushima nuclear-plant disaster in 2011.

“Oil is off about $4 since reaching $97.11 on May 20, but these losses pale compare to the Nikkei,” Yawger said.

Bond Purchases

Oil has slipped 2.5 percent in three days on ample stockpiles of petroleum and concern that the U.S. economy won’t increase demand. Bernanke said yesterday the Fed may taper its $85 billion a month of purchases if it’s 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.”

Gasoline Stockpiles

U.S. gasoline supplies rose 3.02 million barrels last week, the biggest gain since the week ended Jan. 4, the Energy Information Administration said yesterday. Consumption of gasoline over the past four weeks was 8.5 million barrels a day, the lowest seasonal level in at least 10 years, EIA data show. The peak-demand summer driving season when Americans usually take vacations begins with the May 27 Memorial Day holiday.

U.S. crude supplies slipped 338,000 barrels to 394.6 million last week, the EIA report showed. A 1 million-barrel decline was forecast in a 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.

Implied volatility for at-the-money WTI options expiring in July was 21.7 percent, compared with 22.1 yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 578,731 contracts as of 2:58 p.m. It totaled 617,233 contracts yesterday, 6.4 percent above the three-month average. Open interest was 1.75 million contracts.

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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