WTI Caps Weekly Drop as China Cuts Manufacturing


 By Mark Shenk - Jul 26, 2013 12:58 PM GMT-0700

From Bloomberg

West Texas Intermediate crude fell, capping the first weekly drop in more than a month, on speculation that China’s plans to cut excess manufacturing capacity will reduce fuel consumption.

Futures slid 0.7 percent after China ordered more than 1,400 companies in 19 industries to cut excess production capacity this year, part of efforts to shift toward slower, more-sustainable economic growth. WTI reached $109.32 a barrel on July 19, the highest level since March 2012, on signs the U.S. economy is rebounding and on declining crude supplies.

“The news that China is ordering the reduction of excess capacity has reignited concerns about slowing Chinese growth and what that’s going to mean for energy demand,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We are still in the midst of a correction after reaching a 16-month high last week.”

WTI crude for September delivery declined 79 cents to $104.70 a barrel on the New York Mercantile Exchange. It was the lowest settlement since July 9. Prices, which fell 3.1 percent this week, have gained 14 percent this year. The volume traded was 34 percent below the 100-day average at 3:56 p.m.

Brent for September settlement dropped 48 cents, or 0.4 percent, to end the session at $107.17 a barrel on the London-based ICE Futures Europe exchange. It was the lowest closing price since July 4. The volume of all futures traded was 48 percent below the 100-day average.

Various Grades

The European benchmark traded at a $2.47 premium to WTI, compared with $2.16 yesterday. Brent fell below the U.S. grade in intraday trading July 19 for the first time since August 2010. The bonus paid for Brent from the North Sea has shrunk from as much as $23.44 a barrel on Feb. 8 because of the easing of a supply bottleneck in the U.S.

“WTI has to trade at a discount to waterborne grades like Brent or the economics don’t work,” said Mike Wittner, head of oil-market research for the Americas at Societe Generale in New York. “We couldn’t sustain the move higher in WTI.”

Steel, ferroalloys, electrolytic aluminum, copper smelting, cement and paper are among areas affected, China’s Ministry of Industry and Information Technology said in a statement yesterday, in which it announced the first-batch target of this year to cut overcapacity. Excess capacity must be idled by September and eliminated by the end of the year, the ministry said, identifying the lines to be shut within factories.

U.S. equities also dropped after the Chinese announcement. The Standard & Poor’s 500 Index fell 0.2 percent and the Dow Jones Industrial Average retreated 0.3 percent at 2:46 p.m.

Fibonacci Retracement

WTI’s decline will quicken if the contract drops below $102.96, a key Fibonacci level, said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. The figure is the 38.2 percent retracement level from a June 24 low of $92.67 to the high on July 19.

After breaking through yesterday’s low of $104.08, “prices will test $102.96, which is a big number on the Fibonacci retracement,” Yawger said. “A violation of those numbers could accelerate the move to the downside.”

WTI snapped the longest streak of weekly gains since March. U.S. crude production climbed to 7.56 million barrels a day in the seven days ended July 19, the most since December 1990, the Energy Information Administration said July 24. Refiners reduced processing by half a percentage point to 92.3 percent of capacity after five weeks of increases, according to the EIA, the Energy Department’s statistical unit.

Market Outlook

Futures may drop next week on concern that U.S. economic growth will slow, curbing fuel demand, a Bloomberg survey showed. Twenty-four of 38 analysts and traders, or 63 percent, forecast WTI will decrease. Nine respondents, or 24 percent, predicted a gain and five projected no change.

Tropical Storm Dorian became less organized and may weaken as it moves across open waters of the Atlantic, according to the U.S. National Hurricane Center.

Dorian, with maximum sustained winds of 50 miles (80 kilometers) per hour, was about 1,295 miles east of the northern Leeward Islands and moving west-northwest at 21 mph, according to a center advisory before 11 a.m. in New York.

Implied volatility for at-the-money WTI options expiring in September was 21 percent, down from 21.7 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 372,376 contracts as of 3:57 p.m. It totaled 589,799 contracts yesterday, 11 percent below the three-month average. Open interest was 1.85 million contracts.