Oil Slides After Global PMIs Signal Economic Downturn

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange moved lower in early trade Tuesday as investors parsed through bearish economic data for the United States, Eurozone, and China, indicating a deeper downturn for global oil demand at the start of the fourth quarter compounded by unusually mild weather across the European continent so far this month, easing demand for gas-to-oil switching in power generation.

Dutch Transfer Title Facility gas futures for November delivery slid to 97.5 euros per megawatt-hour on Tuesday, down from 200 euros seen a month earlier, and the lowest trade since mid-June. The combination of milder weather and full gas storage in some of Europe's largest economies dragged European gas prices lower.

TTF prices for January and February remain above 100 euros MWh but are down considerably since Russia first halted gas deliveries to European buyers this summer.

Warm weather is welcome news for European manufacturers that have already struggled with sky-high energy prices eroding their output and profits.

Germany's Purchasing Manufacturing Index for October fell to a lower-than-expected 44.1, down from 45.7 in September. This is not only a 29-month low but is also the fourth consecutive month that the PMI has been below the neutral 50 level, clearly suggesting negative GDP growth. The 50-mark separates growth from contraction.

"We're seeing weakness across the board in the survey data, with both the manufacturing and service sectors reporting accelerating rates of contraction, led by rapidly declining inflows of new work," said Phil Smith, Economics Associate Director at S&P Global Market Intelligence.

Domestically, survey on business activity for early October showed a surprise contraction across service and manufacturing sectors of the U.S. economy as operators fretted over rising interest rates and absent consumer demand. Except for the pandemic months of April and May 2020, the rate of decrease was the second-fastest since the 2008 Global Financial Crisis.

"The U.S. economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply. Clearly this is unsustainable absent of a revival in demand, and it's no surprise to see firms cutting back sharply on their input buying to prepare for lower output in coming months," commented Chris Williamson, chief business economist at S&P Global Market.

On the back of weaker economic data, investors markedly reduced bets on another 0.75% increase in federal funds rates from the Federal Open Market Committee in December.

FOMC is still expected to raise the federal funds rates by another 0.75% at their Nov. 1-2 meeting, which would be the fourth consecutive rate hike of this magnitude in as many meetings. Fed officials are raising rates at the most aggressive pace since the early 1980s, and some officials are becoming concerned about a deep recession as rate hikes work themselves into the economy.

"I worry that if the way you judge it is another bad inflation report must be that we need more rate hikes that puts us at somewhat greater risk of responding overly aggressive," said President of Chicago Federal Reserve Bank Charles Evans last week.

Near 7:30 a.m. EDT, December West Texas Intermediate futures dropped $1.36 barrel (bbl) to $83.28 bbl, and the international crude benchmark Brent contract for December delivery fell $1.24 bbl to $91.90 bbl. ULSD futures for November delivery shed 3.96 cents to $3.8805 gallon, and November RBOB futures declined 3.22 cents to $2.6980 gallon.

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

Liubov Georges