Bloomberg News

Oil Falls to One-Month Low as U.S. Manufacturing Index Slips

August 01, 2011

Aug. 1 (Bloomberg) -- Crude oil declined to a one-month low after a gauge of U.S. manufacturing showed growth at the slowest pace in two years, a sign the economic expansion is faltering.

Futures dropped for a second day after the Tempe, Arizona- based Institute for Supply Management said its factory index decreased to 50.9 in July from 55.3 in June. Prices climbed earlier when President Barack Obama said congressional leaders approved a deal to raise America’s debt ceiling, signaling the country will avoid a default.

“The agreement may have helped prevent a crash of the economy in the short term, but there’s still a lot to worry about,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “The economy hardly grew in the first half of the year and the outlook for growth isn’t promising.”

Crude for September delivery fell 81 cents, or 0.9 percent, to $94.89 a barrel on the New York Mercantile Exchange, the lowest settlement price since June 29. Prices are up 20 percent over the past year.

The front-month contract also fell below the 200-day moving average for the first time since July 12, triggering a “broad selloff,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas. The moving average was $94.93 today.

Brent for September settlement gained 7 cents to $116.81 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract was at a $21.92 premium to New York futures, down from a record $22.63 on July 14, based on closing prices.

‘Sobering Reminder’

“The initial euphoria over the debt ceiling was overdone, and the ISM report was a sobering reminder of the problems we face,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The S&P turned on the manufacturing numbers and oil followed.”

The Standard and Poor’s Index declined 0.6 percent to 1,284.78 at 3:04 p.m. in New York.

The July manufacturing index is lower than the median estimate of 54.5 in a Bloomberg News survey of 80 economists. A measure of new orders fell to 49.2, showing the first contraction since June 2009.

U.S. gross domestic product climbed at a 1.3 percent annual rate last quarter after expanding 0.4 percent in the first three months of 2011, the worst performance since the start of the recovery in June 2009, the Commerce Department said on July 29.

’A Shocker’

“The ISM manufacturing number is a shocker and it’s backed up by last week’s GDP number,” said Richard Ilczyszyn, a Chicago-based senior market strategist at MF Global. “With the combination of the bad numbers here, this could be construed as sustained slow growth.”

Manufacturing in the U.K., Russian and Australia shrank last month, while the pace of factory growth slowed in Europe and China, according to surveys today.

In the U.K., a factory gauge by Markit Economics fell to 49.1, the lowest since June 2009, from 51.4, and a measure for Russia slipped to 49.8 from 50.6. Australia’s index slid to a two-year low of 43.4 from 52.9. Readings below 50 indicate contraction.

Europe’s index of manufacturing growth cooled to 50.4, the slowest pace in 22 months, from 52 in June. China’s purchasing manufacturing index moderated to 50.7 from 50.9, the China Federation of Logistics and Purchasing said.

Debt Ceiling

Crude gained after Obama spoke from the White House and Senate Majority Leader Harry Reid endorsed the emerging accord between Republican leaders and the administration.

Congressional leaders are sifting through the details of the tentative bipartisan agreement to raise the debt ceiling, preparing to sell the deal to skeptical Republicans and Democrats before possible votes today.

The deal would raise the $14.3 trillion debt ceiling through 2012, cut spending by about $1 trillion and call for enactment of a law shaving another $1.5 trillion from long-term debt by 2021, or institute punishing reductions across all government areas, including Medicare and defense programs, according to congressional officials.

The Organization of Petroleum Exporting Countries’ crude output rose in July to the highest level since December 2008, led by gains in Saudi Arabia and Angola, according to a Bloomberg News survey. Production increased 245,000 barrels, or 0.8 percent, to average 29.565 million barrels a day, according to the survey of oil companies, producers and analysts.

Hedge funds and other large speculators raised wagers on rising oil prices by 5 percent to 191,423 futures and options combined in the week ended July 26, according to Commodity Futures Trading Commission’s weekly Commitments of Traders report.

Oil volume in electronic trading on the Nymex was 608,203 contracts as of 2:36 p.m. in New York. Volume totaled 472,260 contracts on July 29, 30 percent below the average of the past three months. Open interest was 1.52 million contracts.

--With assistance from Jennifer Ryan in London. Editors: Richard Stubbe, Dan Stets

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net Moming Zhou in New York at Mzhou29@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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