Oil Reverses Early Gains

NEW YORK (DTN) -- New York Mercantile Exchange oil futures advanced Tuesday morning after China's new stimulus measure lifted market sentiment and offset weak manufacturing data. The oil gains were also in line with rising global equities and risk-on trade, analysts said.

They said the People's Bank of China's unexpected cut in reserve ratio requirements for large lenders on Monday frees up more money for lending and investment, and raises the prospect of increased oil demand. The bank's action was followed by the release of official data overnight showing China's purchasing manager's index fell to 49.0 in February, down from 49.4 for January. That's the seventh straight decline and the lowest official PMI since 2009. A reading below 50 signals a contraction.

A separate set of data by London-based information provider Markit showed manufacturing PMI was 48.0 for February, down from 48.4 for January. Taken together, the PMI data reinforces the perception that China's economy is slowing down.

Beijing is attempting to shift from a manufacturing intensive, export-based economy to a domestic consumption-based economy. Analysts expect China to continue with a dovish monetary policy as long as growth continues to be sluggish, which is bullish for oil futures.

At 8 a.m. CT, NYMEX April West Texas Intermediate crude futures moved 47 cents higher at $34.22 barrel, while May Brent crude oil futures on the IntercontinentalExchange gained 29 cents to $36.86 bbl. In products trade, the NYMEX April ULSD futures contract jumped 1.89 cents to $1.1126 gallon, while April RBOB futures edged up 0.22 cents to $1.3229 gallon.

NYMEX March oil products futures and ICE April Brent crude futures expired at Monday's closing bell.

Since the 8 a.m. CT quotes, the market has reversed down.

On Wall Street, U.S. stock indices were higher Tuesday morning, tracking gains for overseas bourses as well as oil futures, while the dollar rose to a fresh one-month high versus its peer currencies.

The oil market was also lent support from expectations for a weekly stock draw from domestic distillates and the prospect of lower oil production from the United States and elsewhere.

The U.S. oil rig count fell by another 13 rigs last week to 400, a six-year low, Baker Hughes data released Friday showed. An early survey of analysts shows the market expects gasoline and distillate stocks to have fallen by 2.0 million bbl each in the week-ended Feb. 26 while crude oil stocks are seen to have increased by 4.0 million bbl.

Reports said discussions were ongoing between the Organization of Petroleum Exporting Countries and non-OPEC to sign on to a tentative deal announced about two weeks ago by Saudi Arabia and Russia that would freeze production at January levels. Saudi Arabia said Monday that it remained willing to work with Russia and other OPEC members to stabilize prices, but it won't cut oil production.

Also, Bloomberg News reported its survey showed OPEC production declined by 79,000 barrels per day to 33.06 million bpd in February while Reuters reported its survey showed OPEC production fell 280,000 bpd to 32.37 million bpd last month due to lower output in Nigeria and Iraq. These declines from Iraq and Nigeria offset the increase in Iranian oil production.

George Orwel can be reached at george.orwel@telventdtn.com