Oil Declines as U.S. Strike Seen Cutting Refinery Demand

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Will Oil’s Big Decline Drag Down Other Commodities?

Oil fell in New York amid speculation that the biggest strike at U.S. refineries since 1980 will curtail crude processing in the world’s leading consumer nation and worsen a global oversupply.

West Texas Intermediate futures dropped as much as 3.3 percent. The United Steelworkers union, which represents employees at more than 200 U.S. refineries, terminals, pipelines and chemical plants, stopped work on Sunday at nine sites after failing to agree on a labor contract. China’s Purchasing Managers’ Index slid to 49.8 last month from 50.1 in December, below a reading of 50 that separates expansion from contraction.

Rising U.S. supply has contributed to a global surplus that drove oil prices almost 50 percent lower last year. The Organization of Petroleum Exporting Countries, which has resisted calls to cut output, boosted production in January as Iraq pumped at a record pace, according to a Bloomberg survey of oil companies, producers and analysts.

“Suppliers are not going to stop producing just because of refinery strikes so as soon as refineries get full there is nowhere else for it to go so it’s like a dam,” Michael Hewson, senior market analyst at London-based CMC Markets Plc, said by phone. “Pressure remains on the downside for prices but that’s not to say we might not have a temporary stabilization this week.”

West Texas Intermediate for March delivery lost as much as $1.57 to $46.67 a barrel in electronic trading on the New York Mercantile Exchange and was at $47.90 at 10:47 a.m. London time. The contract gained 8.3 percent on Jan. 30, the largest one-day increase since June 2012. Total volume was about 33 percent above the 100-day average. Prices have decreased 11 percent this year.

Refinery Strike

Brent for March settlement declined as much as $1.58, or 3 percent, to $51.41 a barrel on the London-based ICE Futures Europe exchange, before paring the decline to trade little changed. It climbed $3.86 to $52.99 on Jan. 30. The European benchmark crude traded at a premium of $4.98 to WTI.

The steelworkers’ union that went on strike said in a statement that it “had no choice.” It rejected five contract offers made by Royal Dutch Shell Plc on behalf of oil companies including Exxon Mobil Corp. and Chevron Corp. since talks began on Jan. 21.

The union hasn’t called a national stoppage since 1980, when a halt lasted three months. The refineries on strike can produce 1.82 million barrels a day of fuel, about 10 percent of total U.S. capacity, data compiled by Bloomberg show.

“If the strike escalates, that would be detrimental to the oil price,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone.

Gasoline Profits

Gasoline in New York was at a premium of $15.30 a barrel to crude at Cushing, Oklahoma, the delivery point for WTI contracts. That’s the highest profit from making the motor fuel since September.

U.S. drillers idled 94 oil rigs last week, the most since Baker Hughes Inc. began collecting data in 1987. The number of active machines shrank to a three-year low, said the Houston-based oilfield services company. Still, investors are probably “too excited” about rig counts, according to Morgan Stanley.

“The market fails to appreciate that the relationship between rig count and production can be deceptive,” analysts at the bank, including Adam Longson in New York, said in an e-mailed report on Feb. 2. “All rigs and wells are not created equal, and in the initial wave of capex cuts, producers are focusing on quickly trimming the least productive assets.”

Chinese Economy

In China, the government’s PMI released Feb. 1 was below the median projection of 50.2 in a Bloomberg News survey of 22 economists. A separate gauge Feb. 2 from HSBC and Markit Economics was at 49.7, also missing estimates.

The Asian nation, the world’s second-largest oil consumer, will account for about 11 percent of global demand this year, forecasts from the International Energy Agency in Paris show.

OPEC, which supplies about 40 percent of the world’s oil, pumped 30.91 million barrels a day in January, according to the Bloomberg survey. The 12-member group agreed at a Nov. 27 meeting to maintain its production target at 30 million. Iraqi output increased by 200,000 barrels a day to 3.9 million, the biggest gain after Saudi Arabia.

Money managers reduced their net-long positions on WTI for a second week through Jan. 27, raised short bets to the highest level since 2010, the U.S. Commodity Futures Trading Commission said in a report.

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