Oil down over $1 as China data disappoints

Reuters, Friday 1 Jul 2011

Brent crude oil slipped over $1 to around $111 a barrel on Friday after China's factory output grew at its slowest pace in 28 months, and the market eyed tenders for the IEA's emergency oil stocks releases

Employees assemble remote controls of air conditioners and water heaters along a production line at a factory in Hefei, Anhui province (Photo: REUTERS / Stringer)

At 0857 GMT, ICE Brent crude futures were down $1.30 to $111.19 a barrel, off an intraday low of $110.67, and U.S. crude futures were down 87 cents to $94.55, after getting down to $94.18 a barrel.

The market took a knock after China's official purchasing managers' index (PMI) for June came in lower than forecast at 50.9, as weaker global demand and a tighter monetary policy trimmed production. Analysts' expectations were for a reading of 51.3, according to a Reuters poll.

Investors are nervous about any signs of a slowdown in the country driving global growth as the U.S. economic recovery loses momentum and Europe struggles with its sovereign debt crisis.

Although the Greeks voted for the austerity package on Thursday, there was some scepticism they can deliver on the cuts they promised to implement given the level of anger at street level.

"The euphoria after the Greek vote is over so support from that side is fading," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. The market's focus is now expected to shift to the U.S. PMI and ISM numbers due later today.

"If they give further indication that two of the world's largest economies are slowing down it will be bearish for oil prices," Fritsch said.


Investors also wondered how well the market will absorb the International Energy Agency's release of emergency oil stocks as Germany, the Netherlands and the United States began seeking bids for their crude supplies.

Brent has rallied over the last couple of days, partly due to dollar weakness versus the euro, traders said, and the IEA releases were expected to take some wind out of its sails.

"I think the increase that we have seen in prices since the start of the week was exaggerated, and there was a reason to come back from these lofty levels," said Fritsch. "With the news of the IEA release there is no reason why prices should stay above $110 a barrel."

Christopher Bellew, a trader at Jefferies Bache, added: "We've now gone back to the trading range we had before the IEA announcement. The market is not really trending up or down, it's just moving sideways."

Ecuador, a member of the Organization of the Petroleum Exporting Countries, did not see the release having any long-term impact on the market.

"These strategic reserves can be compared to a pail of water in an Olympic pool," said Oil Minister Wilson Pastor.

Some traders and analysts said the agency's planned 60 million barrel crude and oil product release has been badly coordinated outside the United States.

OPEC oil output is expected to remain lower in June than before the conflict in Libya largely shut down its oil industry, despite extra supply from Saudi Arabia and other Gulf members.

However, Libyan rebel forces are now just 50 miles from Tripoli, raising expectations that the conflict may come to a close sooner than anticipated.

Bellew suggested the decline today might be due to the possibility of the Libyan war ending sooner than expected.

"But although that might undermine prices in the short term, in the longer term, the Saudis, who have been feeding out a bit more oil, would cut back their output."

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