DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the first trading day of August with sharp losses triggered by weaker-than-expected economic data for China that showed a derailed recovery in its manufacturing sector following a brief rebound from spring lockdowns, while the return of Libyan oil production to the global market pressured the international crude benchmark below $100 barrel (bbl).

Libya's National Oil Company (NOC) on Sunday, July 31, said the country's crude production returned to its pre-pandemic level of 1.2 million barrels per day (bpd) following the lifting of force majeure on oil exports two weeks prior. NOC's new board of directors lifted all force majeure declarations at Libya's oil terminals and fields on July 15 after a three-month shutdown triggered by violent protests. Libya's oil sector has been severely impacted by ongoing political turmoil, with various groups seeking control of the oilfields and the revenues they generate. Just a month ago, Libyan crude production averaged just about 650,000 bpd amid force majeure on loadings out of the Es Sider and Ras Lanuf terminals, as well as production at the El-Feel oil field.

Libya' s fragile ceasefire may indeed prove short-lived as many times before over the past two years as the country descended deeper into political chaos. For now, the return of more than 1 million bpd in Libyan oil production will weigh on the oil market and prices.

The return of Libya's oil production comes against a backdrop of a deteriorating macroeconomic outlook in China, European Union, and the United States -- the world's largest demand centers. In China, business activity across the manufacturing sector unexpectedly fell to a three-month low 49 reading in July, which is also indicative of a contraction. Details of the report showed Chinese manufacturers continued to struggle with high raw material prices, ongoing flare-ups of COVID-19, and disrupted supply chains. Slower-than-expected international demand for Chinese manufactured goods also weighed on the forward outlook.

"The level of economic prosperity in China has fallen, the foundation for recovery still needs consolidation," NBS senior statistician Zhao Qinghe said in a statement on the bureau website.

In Europe, the manufacturing sector fell deeper into contraction at the start of the third quarter, with July Purchasing Manager's Index data showing the sharpest decline in production since the initial wave of strict COVID-19 lockdowns in May 2020. Germany, France, Italy, and Spain all recorded sub-50 readings in their respective headline manufacturing PMIs.

"Eurozone manufacturing is sinking into an increasingly steep downturn, adding to the region's recession risks. New orders are already falling at a pace which, excluding pandemic lockdown months, is the sharpest since the debt crisis in 2012, with worse likely to come," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

U.S. manufacturers, meanwhile, reported the slowest expansion in two years last month, according to the Institute of Supply Management, with headline figure easing to 52.8, albeit still in expansion territory. The figures highlight softer demand for merchandise as the economy struggles for momentum.

"Panelists are now expressing concern about a softening in the economy, as new order rates contracted for the second month amid developing anxiety about excess inventory in the supply chain," said Timothy Fiore, chair of ISM's Manufacturing Business Survey Committee.

Separately, oil traders also await the beginning of a two-day meeting among Organization of the Petroleum Exporting Countries and Russia-led producers scheduled for Tuesday-Wednesday. The meeting will mark the end of the historic production cuts introduced in April 2020 in response to the global pandemic which are now fully unwound as OPEC+ members return the final 648,000 bpd of the reduction effective Monday.

Sources close to OPEC+ talks suggest the group is leaning towards keeping their crude output target unchanged at 43.85 million bpd for September while pushing laggard members to catch up on missed quotas.

At settlement, West Texas Intermediate futures for September delivery declined $4.73 barrel (bbl) to $93.89 bbl. Brent October futures managed to finish a session a tad above $100 bbl, still down nearly $4 on the session. NYMEX September RBOB dropped 11.51 cents to $2.9981 gallon, while NYMEX September ULSD contract slid 10.9 cents to $3.44 gallon.

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