DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange sold off during the final trading session of October, pressured by growing evidence of a global economic slowdown that overtook concern about very low levels of distillate fuels on both sides of the Atlantic Basin.

After mixed overnight trading, weaker-than-expected manufacturing data for China pressed the crude contracts lower that was followed by an unexpected decline in manufacturing activity in the Chicago region, eliciting concern over broadening economic weakness.

Chicago's Manufacturing Purchasing Manager's Index unexpectedly slipped deeper into contraction in October, down 5 points to 45.2 against expectations for a 47.3 reading, pressured by a decline in New Orders and Supplier Deliveries after September's across-the-board collapse. New Orders fell for the fifth consecutive month in October amid weakening demand.

The Chicago PMI reading comes ahead of Tuesday's measure of U.S. manufacturing activity by the Institute of Supply Management, which is expected to show the sector stalled at 50 in October from September's 50.9 reading, with 50 the demarcation line between growth and contraction.

Overnight, China's National Bureau of Statistics reported manufacturing PMI fell 0.9 points to 49.2 in October, as mass lockdowns under Beijing's zero-COVID policy joined slowing demand for exports. China's factory activity was in contraction for seven out of the past 10 months.

Separately, Eurostat earlier Monday issued its preliminary reading for third quarter gross domestic product for the 19-country Eurozone bloc showing modest growth of 0.2% following a second quarter expansion of 0.8%. An energy crisis on the continent as the heating season begins, higher interest rates, and surging inflation are poised to weigh heavily on Eurozone economic output over the next several months. Eurozone inflation on an annualized basis spiked 10.7% in October from 9.9% in September, well above expectations for a 9.8% reading. Energy prices were the key driver in lifting inflation.

The U.S. Dollar Index rallied 0.74% to 111.420 against a basket of foreign currencies Monday ahead of Tuesday's start to the Federal Open Market Committee's two-day meeting, with Fed officials widely expected to lift the federal funds rate another 75 basis points to a 3.75% to 4% target range. There is speculation the Fed is considering slowing the pace of rate hikes following this week's meeting, although CME's FedWatch Tool showed a 50.6% probability for another 75-point increase in the federal funds rate at their Dec. 13-14 meeting, up from a 46.8% probability earlier Monday.

NYMEX West Texas Intermediate, which has an inverse relationship with the dollar, settled down $1.37 at $86.53 barrel (bbl). ICE December Brent futures expired down $0.94 at $94.83 bbl, with the January contract settling at a $2.02 discount to the expiring contract at $92.81 bbl.

NYMEX November RBOB futures expired $0.0959 lower at $2.8107 gallon, rolling off the board at a $0.285 premium to the December contract, with the gasoline market in backwardation through February 2023 delivery. November ULSD futures plunged $0.3589 to a $4.1909 gallon expiration, narrowing extreme backwardation in the prompt spread to $0.5168 gallon after settling Friday's session at $0.8043 gallon. That's the widest prompt spread since April's blow out to a record high at $1.1270 gallon.

While selling off into expiry, ULSD futures are poised to advance on low supply that's trumping slowing economic growth. Diesel fuel demand closely correlates with the performance of the economy in the United States.

Less overseas freight at U.S. ports and slowing activity at U.S. factories while climbing interest rates hobble home sales and construction are headwinds for diesel fuel demand. However, domestic inventory is 25 million bbl below the five-year average and at 106.4 million bbl near the 100 million bbl assumed minimum operating level for efficient midstream and downstream industry activity. Nationwide distillate inventory hasn't fallen below 100 million bbl since June 2003.

Regionally, distillate stocks are at record lows for the beginning of the heating season in New England and Central Atlantic states at 3.263 million bbl and 11.362 million bbl, respectively, as of Oct. 21, according to Energy Information Administration data. These critically low stock levels are causing allocations and product runouts at distribution terminals along the East Coast.

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