Crude Futures Slide as Chinese Factory Activity Stalls

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

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange moved mixed early Monday, with the crude contracts lower after data from China's National Bureau of Statistics showed the country's factory activity fell back into contraction in October, while critical shortages of diesel fuel pushed the ULSD contract higher.

NBS reported China's manufacturing purchasing manager's index fell 0.9 points to 49.2 this month, with readings below 50 signaling contraction. China's manufacturing activity has suffered from mass lockdowns under Beijing's zero-COVID policy, having now shown contraction in seven out of 10 months so far in 2022. According to Reuters, who cited Japan's Nomura Holdings, Inc., there were 31 cities in China that have either locked down their cities or deployed some kind of control measure affecting about 232 million people. Those numbers could expand as infections were reported at a Foxconn iPhone assembly facility in Zhengzhou over the weekend.

Weaker exports also weighed on China's manufacturing activity in October as economic growth slows globally. In a preliminary reading, Eurostat reported third quarter gross domestic product for the 19-country Eurozone bloc grew a modest 0.2% as expected following a second quarter expansion of 0.8%. Meanwhile, annualized inflation in the Eurozone surged 10.7% in October from 9.9% in September, with the preliminary reading well above expectations for a 9.8% reading. Energy prices were the key driver in lifting inflation.

West Texas Intermediate futures were lower early Monday despite a stronger U.S. dollar, with the dollar index strengthening for a third consecutive session, up 0.43% in early trading against a basket of foreign currencies ahead of Wednesday's decision on interest rates by the Federal Open Market Committee. The two-day meeting kicks off Tuesday, with the market overwhelmingly anticipating central bank officials will lift the federal funds rate by another 75-basis points to a 3.75% to 4% target range. A thin majority of the market anticipate the Fed will slow the size of rate hikes during their final meeting of the year in December, with CME's FedWatch Tool showing a 46.8% probability for another 75-basis-point increase in the federal funds rate to a 4.5% to 4.75% target range and 47.9% probability for a 50-point hike.

Once again, the outlier, ULSD futures are higher for a seventh consecutive session early Monday, and ahead of the November contract's expiration this afternoon, as a widening shortage of diesel fuel is pushing prices higher. Shortages of the middle distillate fuel are reported in Europe and eastern United States, and are expanding westward, with allocations and supplier outages popping up all along the eastern seaboard and inland to Tennessee. Low water levels on the Mississippi River are further aggravating resupply, with reports last week indicating Valero Energy cut runs at its Memphis Refinery by about 20% due to shipping issues on the Mississippi River.

Just ahead of 8 a.m. EDT, NYMEX November ULSD futures were up a little more than 4 cents at $4.5905 gallon amid inside trade, holding below Friday's $4.6841 six-month high on the spot continuous chart. The prompt spread again widened, blowing out to nearly $0.90 gallon, nearing the record high reached in April at $1.1270.

NYMEX November RBOB futures were down modestly near $2.9008 gallon, but the backwardation in the prompt spread also widened sharply ahead of the November contract's expiration Monday afternoon, trading near a $0.40 gallon 10-year high. Limited refining capacity has constrained supply, pushing the gasoline contract higher.

NYMEX December WTI futures were down $1.50 near $86.40 barrel (bbl) in early trading. ICE December Brent futures were about $1.30 lower at $94.45 ahead of contract expiration, holding a roughly $2.10 premium to the January 2023 contract.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne