Crude Erases Last Week's Rally on China Data, OPEC Output Gain

Where Are Oil Prices Headed From Here?
  • China factory gauge shows contraction for 6th month in January
  • Output from Kuwait, Nigeria, Iran advanced last month: survey

Oil erased its longest rally this year on signs industrial activity in China is deteriorating, potentially hurting demand as OPEC pumps record amounts of crude.

Futures tumbled 6 percent in New York. China’s purchasing managers index dropped in January to a three-year low, with the official factory gauge signaling contraction for a record sixth month. Output from the Organization of Petroleum Exporting Countries rose to 33.11 million barrels a day last month following Indonesia’s readmission to the group, data compiled by Bloomberg show. U.S. drillers idled rigs for a sixth week, Baker Hughes Inc. said.

"It looks like the big issue today is the negative Chinese economic data, which signals weaker demand," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "OPEC is showing no sign of curbing production, which will keep us well supplied."

While oil capped a second weekly gain Friday on speculation that OPEC and producers outside the group may cooperate to trim output, prices are down 15 percent this year amid volatile global markets, brimming U.S. stockpiles and the prospect of increased Iranian exports. Chevron Corp. last week posted its first quarterly loss since 2002, which may presage a wave of writedowns as other super-majors begin announcing results. Exxon Mobil Corp. and BP Plc are set to report Tuesday.

OPEC Output

West Texas Intermediate for March delivery fell $2 to settle at $31.62 a barrel on the New York Mercantile Exchange. Futures climbed 4.4 percent last week. Total volume traded was 32 percent above the 100-day average at 2:40 p.m.

Brent for April settlement declined $1.75, or 4.9 percent, to $34.24 a barrel on the London-based ICE Futures Europe exchange. The March contract expired Friday after advancing 2.5 percent to $34.74. The European benchmark crude closed at an 88-cent premium to April WTI.

Energy companies were nine of the 10 biggest losers on the Standard & Poor’s 500 Monday. The S&P 500 Oil & Gas Exploration and Production Index dropped 3.4 percent.

Manufacturing PMI in China came in at 49.4, lower than a median estimate of 49.6 in a Bloomberg survey of economists. That represents the longest stretch on record of readings under 50, which indicates contraction. China is the biggest oil consuming country after the U.S.

Manufacturing in the U.S. shrank in January for a fourth consecutive month. The 48.2 reading for the Institute for Supply Management’s index followed December’s 48 level , which was the weakest since June 2009, data from the Tempe, Arizona-based group showed Monday.

Setting Terms

"We had a short-covering rally last week and that’s now played out," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion in assets. "Global economic growth is slowing and we aren’t seeing any action to reduce supply. OPEC and other producers aren’t negotiating, they’re just setting terms."

OPEC’s January production includes 815,000 barrels from Indonesia, which contributed for the first time since its membership was restored Jan. 1 after a seven-year suspension, according to the Bloomberg survey. Nigeria, Kuwait and Iran had the three-biggest gains.

Oil climbed last week after Interfax reported that OPEC and Russia might discuss cooperation to address the global supply excess, citing Jan. 28 comments from Russian Energy Minister Alexander Novak. Novak said Jan. 29 that no such meeting was planned with OPEC members.

Highly Unlikely

It’s “highly unlikely” that a joint production cut will be agreed on, analysts Jeff Currie and Damien Courvalin at Goldman Sachs Group Inc. said in a report, as the strategy of OPEC leader Saudi Arabia to maximize its revenues by squeezing out rivals is finally showing signs of success.

Hedge funds increased bullish bets by the most since 2010, according to data from the U.S. Commodity Futures Trading Commission. Speculators’ net-long position in WTI rose 35 percent in the week ended Jan. 26 to 110,432 contracts of futures and options.

U.S. crude stockpiles probably rose 3.75 million barrels last week, a Bloomberg survey showed before a report from the Energy Information Administration on Wednesday. Inventories climbed to 494.9 million barrels in the week ended Jan. 22, the highest since 1930.

"If we get a big crude number in this week’s inventory data, we’ll be looking at more than 500 million barrels, which I can’t imagine will be positive," Yawger said.