Oil Futures Pare Gains

WASHINGTON (DTN) -- Oil futures on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange settled mostly higher on the first trading day of December, except for the NYMEX RBOB contract, which retreated to a six-week low settlement after the U.S. ISM manufacturing index contracted for the fourth consecutive month in November. This stoked fears over a further slowdown in industrial activity and its deleterious effect on fuel consumption in the world's largest economy.

At settlement, NYMEX January West Texas Intermediate futures moved up $0.79 to $55.96 barrel (bbl) and ICE February Brent contract ended the session $0.43 higher at $60.92 bbl. Product futures ended mixed, with NYMEX January ULSD futures gaining 0.75 cents to $1.8860 gallon and NYMEX January RBOB futures declined 1.77 cents to $1.5733 gallon.

The Institute of Supply Management reported Monday the U.S. manufacturing index slipped 0.2 points in November to 48.1, well below market consensus for a 49.4 reading. The ISM manufacturing index has struggled to recover above the 50 threshold for four consecutive months now, having dropped to a 10-year low of 47.2 in September. The decline in domestic manufacturing activity also coincides with the breakdown in U.S.-China trade talks in late August, resulting in punishing tariffs on each other's products and creating an environment of uncertainty for export-dependent sectors of the economy.

In contrast, China's manufacturing sector has outperformed competitors in the United States and European Union, having posted gains for four straight months since August, according to the Caixin Private Survey. Even the more conservative estimates from China's official data showed the first expansion during the second half of 2019 in November with a 50.6 reading. Overnight figures from Eurozone also showed a slight uptick in the industrial output by the 28-nation economic bloc, suggesting the European Central Bank's massive stimulus package is shoring up the continent's ailing economy.

The bearish buildup in the U.S. manufacturing sector might lead the Federal Reserve to reconsider its course of nonaction in interest rates at its last policy meeting of the year next week. Markets are currently pricing in a 15% chance the Fed will lower rates this month with most expecting the central bank to hold the rate steady at 1.75%.

Investors will also keep an eye for new developments related to this week's meeting between the Organization of the Petroleum Exporting Countries and 10 allied producers led by Russia on Thursday-Friday (12/5-6), when the group is set to debate the fate of their 1.2 million barrels per day (bpd) production cut agreement.

The Wall Street Journal reported Monday that Saudi Arabia will push for OPEC and its partners to extend curbs through mid-2020. However, Russia -- the second largest producer within the group -- indicated it was unwilling to commit to longer cuts and said the group must reconvene in April to again review policy course. Further complicating the debate, Iraq's oil minister suggested OPEC+ should consider cutting crude production by another 400,000 bpd to 1.6 million bpd to shore up prices against faltering demand. All that being said, markets are likely to view unchanged quotas under the deal's current timetable as a bearish development, resulting in a mild selloff.

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

(CZ)

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