Oil Falls on Chinese Manufacturing; Brent Premium to WTI Narrows

May 05, 2014 3:28 pm ET

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May 5 (Bloomberg) -- Brent and West Texas Intermediate crudes fell after Chinese manufacturing contracted for a fourth month in April, bolstering concern that the economy’s slowdown is deepening. Brent’s premium to WTI shrank.

Brent declined 0.8 percent as the final reading of the China Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics slipped to 48.1 for April, missing the median estimate of 48.4 in a Bloomberg survey of economists. Futures rose earlier as violence between Ukrainian government forces and pro-Russian separatists spread from Ukraine’s eastern industrial heartland to the Black Sea gateway of Odessa.

“The disappointing Chinese economic data is sending Brent lower,” Michael Lynch, the president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. “WTI is being pulled lower as well but not by as much.”

Brent for June settlement fell 87 cents to close at $107.72 a barrel on the London-based ICE Futures Europe exchange. The volume of all futures traded was 25 percent below the 100-day average at 3:26 p.m. in New York. U.K. offices were closed today for the May Day bank holiday.

WTI for June delivery slipped 28 cents, or 0.3 percent, to settle at $99.48 a barrel on the New York Mercantile Exchange. Volume was 26 percent lower than the 100-day average.

Narrowing Spread

The U.S. oil closed at an $8.24-a-barrel discount to the North Sea grade, the narrowest since April 29. Brent, which is used to price more than half of the world’s crude and, unlike WTI, can be exported, is often more sensitive to changes in the global supply-and-demand balance.

“A lot what we are seeing today is probably due to the holiday in the U.K., which has reduced volume,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion, said by phone. “That could explain the size of the Brent move.”

An official gauge of Chinese April factory output released last week came in at a lower-than-projected level of 50.4 from 50.3 in March. China passed the U.S. to become the world’s biggest crude importer in September, according to the U.S. Energy Information Administration.

“The Chinese PMI numbers are weighing on the market,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “Anything that points to a slowing Chinese economy is negative for oil, since it’s been the key center for demand growth.”

Ukraine Unrest

The crisis in Ukraine, which has seen the U.S. and European Union impose a series of sanctions on Russia since President Vladimir Putin annexed Crimea in early March, could be a threat to economic growth across Europe, particularly in those countries which border Russia or which are dependent on Russian energy, the European Commission said today.

The commission trimmed its economic growth forecast for the euro area, saying gross domestic product will rise 1.7 percent in 2015, compared with a February prediction of 1.8 percent.

“The Ukrainian situation cuts both ways,” Kilduff said. “The potential for a supply disruption is bullish, while the impact sanctions may have on the already weak Russian and European economies is negative for demand.”

The Ukraine conflict is spurring the world’s leading economies to cut their reliance on Russian energy, U.K. Energy Secretary Ed Davey said in an interview in Rome today before attending a two-day meeting of fellow Group of Seven ministers.

Libyan Ports

Brent also fell on a possible rise in Libyan oil exports. The Zueitina terminal reopened last week for the first time since July. Hariga harbor is operating normally while talks between the government and protesters about opening two oil fields are continuing, Mohamed Elharari, spokesman of state-run National Oil Corp., said by phone from Tripoli.

“Brent is probably moving lower on indications that Libyan oil exports may increase in the weeks ahead,” Kyle Cooper, director of commodities research at IAF Advisors in Houston, said by phone.

U.S. crude supplies rose to 399.4 million barrels in the week through April 25, the EIA said April 30. That’s the most since the EIA began reporting weekly data in 1982.

“It wouldn’t take much for inventories to top 400 million barrels; a build of less than 1 million barrels would be enough,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “We’re in new territory here, and that has to be putting pressure on the market.”

Implied volatility for at-the-money WTI options expiring in June was 17.5 percent, up from 16.4 percent May 2, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 335,221 contracts at 3:26 p.m. It totaled 426,339 contracts May 2, 21 percent below the three-month average. Open interest was 1.64 million contracts.