Bloomberg News

Oil Pares Third Annual Gain as Manufacturing in China Contracts

January 02, 2012

Dec. 30 (Bloomberg) -- Oil fell, paring a third annual increase, as Chinese manufacturing contracted for a second month in December, spurring concern that demand from the world’s second-largest crude-consuming country may slow.

Futures dropped 0.8 percent after the report by HSBC Holdings Plc and Markit Economics also showed China’s exports fell for the first time in three months as Europe’s debt crisis reduced orders. Oil advanced 8.2 percent in 2011 as a collapse in Libyan exports cut supply, U.S. stimulus measures revived the economy and Iran threatened to close the Strait of Hormuz.

“The negative data out of China as well as general European concern put some pressure on crude,” said Tom Bentz, a director with BNP Paribas Prime Brokerage Inc. in New York. “Volume is very light and it doesn’t take a lot to move this market around.”

Crude for February delivery slid 82 cents to settle at $98.83 a barrel on the New York Mercantile Exchange. Prices slipped 1.5 percent this month and 0.9 percent this week. Oil surged 25 percent in the three months ended today, the biggest quarterly gain since the period ended June 30, 2009.

Oil volume in electronic trading on the Nymex was 276,801 contracts as of 4:14 p.m. in New York. Volume totaled 291,175 yesterday, 53 percent below the three-month average. Open interest was 1.32 million contracts.

Brent for February settlement dropped 63 cents, or 0.6 percent, to $107.38 a barrel on the London-based ICE Futures Europe Exchange, up 13 percent this year. Brent rose 4.5 percent in the fourth quarter. It fell 0.5 percent this week and 2.8 percent in December.

Chinese Manufacturing

The Chinese purchasing managers’ index was at 48.7 in December, up from 47.7 in November, according to HSBC and Markit. A reading below 50 indicates a contraction.

A deeper slowdown in China, the world’s second-biggest economy, would impair a global expansion that is already faltering because of Europe’s austerity measures. China used 9.06 million barrels a day of oil in 2010, or 10 percent of world’s total consumption, according to the BP Statistical Review of World Energy.

Crude surged to the highest level in more than two years in May, trading at $114.83 in New York after a popular uprising in Tunisia sparked similar protests across the Middle East and North Africa. Clashes in Libya between rebels and forces loyal to then-leader Muammar Qaddafi cut off more than 1.5 million barrels a day of oil exports from the country.

U.S. Economy

An improving economic outlook in the U.S., the world’s biggest oil consumer, also helped oil, even as Europe’s debt crisis threatened to plunge the region into recession.

“The U.S. economy is getting back slightly and that’s kind of supporting the market,” said Chris Dillman, an analyst and broker at Tradition Energy in Stamford, Connecticut.

The U.S. unemployment rate fell to 8.6 percent in November, the lowest level since March 2009, after lingering at 9 percent or above for seven straight months.

“The economic recovery and geopolitical concern are pushing up oil,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas. “The U.S. is still the world’s biggest oil consumer.”

The U.S. used 19.1 million barrels a day of oil in 2010, or 21 percent of global demand, according to BP’s Statistical Review.

Oil inventories in the U.S. fell to 323.6 million barrels in the week ended Dec. 16, the lowest level since Dec. 26, 2008, according to the Energy Department.

Iranian Threat

Iran threatened this week to block the Strait of Hormuz, a major oil shipping channel, if sanctions are imposed on its crude exports. The country also faces a possible boycott by European buyers. The threat is “irrational behavior,” Victoria Nuland, a U.S. State Department spokeswoman in Washington, said yesterday.

About a fifth of global crude supply travels through the seaway, according to the Energy Department.

“The geopolitical risk premium will support higher prices at the outset of 2012,” said Thina Saltvedt, an analyst at Nordea Bank AB in Oslo. “I expect prices to increase at the start of next week as the tension increases in the world’s most vital oil-producing area.”

Oil prices may rise next week amid geopolitical tension in the Middle East, a Bloomberg News survey showed. Thirteen of 32 analysts, or 41 percent, forecast crude will increase through Jan. 6.

“The odds are looking very high that there will be an oil embargo on Iran next year,” said Phil Flynn, an analyst with PFGBest in Chicago.

Exchanges in New York and London will be closed Jan. 2 to observe the New Year’s Day holiday.

--With assistance from Grant Smith in London and Mark Shenk in New York. Editors: Margot Habiby, Bill Banker

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net

To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net


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