Oil Futures Waver in Early Trading, Head for Weekly Gains

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined in early trading Friday, although all contracts are on course for hefty weekly gains spurred by large inventory draws from U.S. commercial crude and distillate fuel inventories, exacerbated by extended production outages in the offshore Gulf of Mexico, while weaker-than-expected industrial data from Eurozone and the United States capped the market's upside.

Further weighing on the oil complex, U.S. dollar regained upward momentum in overnight index trade after sliding to 93.030 the prior session following U.S. manufacturing data for September that missed market expectations and unemployment claims which unexpectedly rose last week. U.S. Labor Department said Thursday initial unemployment claims, a proxy for layoffs, rose 16,000 to 351,000 last week from an upwardly revised 335,000 the prior week. The increase in COVID-19 cases over the past two months has weighed on consumer sentiment and could have contributed to a hiring slowdown in August, particularly in the leisure and hospitality industry. However, the initial claims numbers suggest that firms haven't reacted by laying off workers broadly.

The missed call on weekly jobless claims was followed by a lower-than-expected reading for the U.S. composite Purchasing Manager's Index at 54.5 against market consensus for a 55.5 reading. The manufacturing component of the index was 60.5 against expectations for a 60.8 reading, with services at 54.4 versus an anticipated 55.1 reading. Some of the slowdown in manufacturing reflects the rotation in spending back to services from goods because of COVID-19 vaccinations. Manufacturing, which accounts for 11.9% of the U.S. economy, remains underpinned by businesses desperate to replenish stocks after inventories were drawn down sharply in the first half of the year.

In financial markets, U.S. equity futures slipped in early trade Friday as investors assess the impact China's Evergrande default would have on growth prospects in the world's second largest economy. China Evergrande, the indebted property developer that is at the heart of systemic risk concerns in Asia, missed an $83.5 million dollar-bond debt payment Thursday and entered a 30-day grace period that it must use to meet obligations for foreign creditors. The impact, however, was muted in overnight trading, as China's central bank injected millions into its financial system and markets rode Walls Street's solid rally Thursday sparked by a dovish U.S. Federal Reserve.

Federal Reserve Chairman Jerome Powell said this week that "it will be suitable to finish tapering around the middle of next year," referring to the central bank's $120 billion in monthly purchases of U.S. bonds and mortgage-backed securities. Tapering isn't expected to begin until the fourth quarter, with the Federal Open Market Committee to meet next Nov. 1-2. Those plans could come undone if the U.S. labor market deteriorates.

At 10 a.m ET, Powell, Fed Vice Chair Richard Clarida, and Fed Governor Michelle Bowman will be speaking at the "Fed Listens" event.

Near 7:30 a.m. ET, NYMEX November West Texas Intermediate futures slipped $0.22 to trade just above $73 per barrel (bbl) after rallying to an eight-week high $73.50 bbl on Thursday, and ICE November Brent futures traded little changed near a 12-week high at $77.16 bbl. NYMEX October ULSD futures declined 1.03 cents to near $2.2388 gallon after surging to 35-month high $2.2565 gallon overnight, and front-month RBOB futures fell 1.37 cents to near $2.1578 gallon.

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

Brian Milne