Crude Oil Falls on Global Manufacturing Slowdown, Strategic Petroleum Reserve Release

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange extended losses into a second session Friday. The moves followed the Biden administration's plan to release a record 180 million barrels (bbl) of crude oil from the Strategic Petroleum Reserve over a six-month period, easing some concern over the loss of Russian barrels on the global oil market. The unprecedented government intervention coincided with a sharp slowdown in manufacturing activity across major global economies amid the fallout from the Ukrainian war and new COVID-19 breakouts and lockdowns in China.

Global manufacturers reported slower growth and far more pessimistic expectations for factory activity in March than in any other month this year, as the war in Ukraine weighed on export demand and led to renewed supply bottlenecks, according to industry surveys. In the United States and European Union, manufacturing activity fell to the lowest level since September 2020, when the Delta variant of coronavirus disrupted much of the global economy.

"Business optimism in the goods producing sector has collapsed to a level indicative of manufacturing output declining in the second quarter and adding to the risk of the economy sliding into a new recession," said Chris Williamson, chief business economist at S&P Global Platts.

European industries in particular have been hard hit with soaring natural gas prices and disrupted trade flows with Ukraine and Russia. For reference, high power prices resulting from the record run in gas prices have taken 900,000 tons of aluminum and 700,000 tons of zinc smelting capacity offline in Europe, according to Goldman Sachs.

"Exploding energy prices, but above all a possible gas embargo, would hit energy-intensive industry -- the mother of the industrial network -- hard," Michael Vassiliadis, president of Germany's IGBCE chemical workers union said in a statement. "The consequences would not only be reduced work hours and job losses, but also the rapid collapse of the industrial production chains in Europe -- with worldwide consequences."

Faced with prospects of economic slowdown, European countries that are part of the International Energy Agency today agreed to a release of oil from emergency reserves, with details of the plan to be announced early next week. The announcement by the IEA comes atop of a planned U.S. release of up to 180 million bbl of crude oil spread out over a period of six months at 1 million bpd starting in May, the biggest-ever drawdown from the country's emergency stocks which now hold 568 million bbl of crude oil.

U.S. manufacturers suffer from similar issues as their European counterparts albeit to a lesser degree due to plentiful domestic natural gas and oil production. Chaos in global supply chains and elevated commodity prices still weighed heavily on industrial output in March, showed data from the Institute of Supply Management.

"March brought back increasing rates of price expansion, due primarily to instability in global energy markets. Suppliers are not waiting to experience the full impacts of price increases before negotiating with their customers," said Timothy R. Fiore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee.

China's manufacturing sector unexpectedly fell into contraction in March, down to 48.1 from 50.4 in the previous month. The slide in the index, where a reading of 50 separates growth from contraction, marks the steepest decline since February 2020. China is grappling with its worst outbreak of COVID-19 since the pandemic began. On Friday, authorities in the financial capital of Shanghai extended a lockdown originally scheduled to last 10 days for an undetermined period following recent lockdowns in Shenyang and at the country's tech hub in Shenzhen.

On the session, NYMEX May West Texas Intermediate futures fell $1.01 to $99.27 per bbl, and the ICE June Brent contract declined $0.32 to $104.39 per bbl. NYMEX May ULSD futures advanced 6.31 cents to $3.4240 gallon, and the May RBOB contract edged up 0.26 cent to $3.1535 gallon.

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

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

Liubov Georges