Oil prices pull back after breathless rally

New York (Sept 1)  Oil prices moved sharply lower on Tuesday as weak Chinese manufacturing data and profit-taking pared some of crude’s 25%-plus gains of the previous three trading sessions.

U.S. oil prices had surged by around 27.5% in the past three days, the largest such rally since Iraq’s invasion of Kuwait in August 1990.

Much of Monday’s gains came after reports that the Organization of the Petroleum Exporting Countries may consider cutting output to boost oil prices, and on signs of a decline in U.S. oil production. Despite hitting multiyear lows toward the end of August, Nymex crude prices  rebounded sharply in recent days to finish up 4.4% for the month, while Brent crude gained 3.7% over the same period.

But soft Chinese economic data helped to weaken oil prices on Tuesday. China’s official manufacturing purchasing managers index fell to 49.7 in August from 50.0 a month ago, official data showed. The Caixin China manufacturing purchasing managers index fell to a final reading of 47.3 in August, the lowest in more than six years.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in October CLV5, -2.48% traded at $47.58 a barrel recently, down 3.3%, or $1.62. October Brent crude on London’s ICE Futures exchange LCOV5, -2.83%  fell $1.51, or 2.8%, to $52.64 a barrel.

China’s latest manufacturing data suggest that “industrial activity softened in August, but the weakness should be temporary and there are good reasons to expect a rebound in coming months,” analyst Julian Evans-Pritchard at Capital Economics said.

“We don’t think the readings are cause for alarm,” he said, adding that China’s economy is increasingly driven by the services sector and the latest weakness reflects temporary disruptions ahead of this week’s Victory Day parade in Beijing.

The rebalancing of China’s economy from an investment- and industry-driven model to a consumption-driven one is being reflected in its fuel demand, where slowing demand for industrial fuels such as diesel is being offset by growing demand for gasoline and jet fuel.

China’s oil imports are expected to maintain rapid growth into 2016, driven by strong stockpiling for its emergency reserves and the lifting of import restrictions for its so-called “teapot” refineries, analyst Ivan Szpakowski at Citi Research said in a note.

“Such stockpiling is headed for a record year, and with the further decline in prices over the past two months, China may turn to overseas facilities to boost its stockpiling program,” Szpakowski said.

Meanwhile, oil traders are still bracing for price swings this month. Asian shares were mostly down Tuesday, with the Shanghai Composite Index SHCOMP, -1.23%  down 1.2%. Initial weekly U.S. oil inventory data is due later Tuesday.

Source: MarketWatch