DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell sharply at the start of the first trading day of August after manufacturing data out of China showed the energy-intensive sector unexpectedly fell into contraction last month, highlighting fears that Beijing's "zero-COVID" policy continues to weigh on the economy after a fleeting rebound from spring lockdowns.

Futures are also lower ahead of a meeting of the Organization of the Petroleum Exporting Countries and Russia-led partners scheduled for Tuesday-Wednesday as historic production cuts introduced in April 2020 in response to the global pandemic are fully unwound as OPEC+ members return the final 648,000 barrels per day (bpd) of the reduction effective Monday.

China's manufacturing Purchasing Managers Index unexpectedly fell to 49 in July, below the 50-point mark that separates contraction from growth, according to National Bureau of Statistics (NBS). The reading was also the lowest in three months, with sub-indexes for output, new orders and employment all contracting. Details of the report showed Chinese manufacturers continued to struggle with high raw material prices, ongoing flare-ups of COVID-19, and disrupted supply chains. Slower-than-expected international demand for Chinese manufactured goods also weighed on the forward outlook.

"The level of economic prosperity in China has fallen, the foundation for recovery still needs consolidation," NBS senior statistician Zhao Qinghe said in a statement on the bureau website.

Fresh economic data fueled pessimism that the country is unable to sustain expected gains in demand growth after widespread COVID-19 lockdowns from March through May. Over the three-month period, China's manufacturing sector fell into a steep contraction, translating to more than 1 million bpd of lost demand, according to Citi Bank estimates.

With no end in sight to the "zero-COVID" policy, a top priority for the Chinese Communist Party, oil demand in the world's second largest economy is unlikely to recover to its pre-pandemic levels anytime soon.

Against this backdrop, oil ministers from OPEC+ will meet this week to decide on the next step in their production policy after fully unwinding the more than 9 million bpd in production cuts in April 2020. The OPEC+ agreement reaffirmed June 30 calls for both Saudi Arabia and Russia to produce 11 million bpd in August, followed by Iraq with a daily production quota of 4.7 million bpd and the United Arab Emirates at roughly 3.2 million bpd. Sources close to OPEC+ talks suggest the group is leaning towards keeping their crude output target unchanged at 43.85 million bpd for September while pushing laggard members to catch up on missed quotas.

Speculation has swirled for weeks as to whether Saudi Arabia is capable of boosting and sustaining production capacity above 11 million bpd. Saudi Crown Prince Mohamed bin Salman recently said the kingdom will seek to increase its oil production to 13 million bpd as early as next year.

"We have an immediate capacity to increase production to 12 million bpd and with investments, production can go to 13 million bpd after which the kingdom will not have any additional capacity to increase production," he added.

The reality is that Saudi Arabia produced near 12 million bpd for only a brief period of time in April 2020 when Riyadh was locked in a bitter price war with Moscow.

Near 7:30 a.m. EDT, West Texas Intermediate futures for September delivery declined $1.90 to $96.70 barrel (bbl). Brent October futures fell $1.56 to $102.41 bbl. NYMEX September RBOB declined 3.37 cents to $3.0795 gallon, while NYMEX September ULSD contract slide 4.36 cents to $3.5054 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com