DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange trimmed earlier gains in afternoon trade Tuesday under pressure from a strengthening U.S. dollar after domestic manufacturing activity rebounded more than expected and to the highest index rating in over a year, raising hopes that a demand recovery will carry into autumn.

Although many uncertainties still exist around a potential second wave of the virus and millions remain unemployed and without an extension of federal relief aid, the solid gains in the manufacturing sector suggest the economy has not run out of steam yet.

Institute of Supply Management said Tuesday domestic manufacturing activity expanded at the strongest pace in more than a year in August, hitting a reading of 56 versus 54.2 expected. The gains were mostly driven by New Orders, up 6.1% from the previous month to 67.6% in August, while the Backlog of the Orders registered an increase of 2.8% to 54.6% on the month.

"The past relationship between the PMI and the overall economy indicates that the PMI for August (56) corresponds to a 3.9% increase in real gross domestic product (GDP) on an annualized basis," said Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee.

Following the data release, U.S. dollar clawed back some 0.2% to trade above key support at 92, while weighing on the front-month West Texas Intermediate futures in afternoon trade Tuesday. WTI October futures ended the session 15 cents higher at $42.76 barrel (bbl) and international crude benchmark Brent advanced 30 cents for a $45.58 bbl settlement. NYMEX RBOB October futures added 1.1 cents to $1.2147 gallon and NYMEX ULSD futures moved 1.35 cents higher to $1.2308 gallon.

Oil futures began drifting higher earlier in the session following better-than-expected manufacturing data out of China and Germany released overnight. German manufacturers reported the fastest output growth since February 2018, crossing the 50 mark that separates growth from contraction for the second time in 20 months. Caixin survey showed China's manufacturing sector expanded at the fastest pace in nearly 10 years at 53.1 in August.

Traders now wait for weekly inventory data from the American Petroleum Institute due out at 4:30 p.m. EDT and U.S. Energy Information Administration on 10:30 a.m. EDT Wednesday. Market consensus calls for domestic crude oil supplies to have decreased by about 3.1 million bbl during the week ended Aug. 28. The U.S. refinery run rate is projected to have decreased around 11% due to the Hurricane Laura shuttering most of the refining complex in the U.S. Gulf Coast. As a result, analysts forecast drawdowns in both gasoline and distillate fuel inventories, with gasoline stocks expected to have decreased by 4.2 million bbl and distillate inventories by 1.8 million bbl on the week.

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

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