DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Tuesday's session with steep losses, sending West Texas Intermediate toward $80 per barrel (bbl). The losses came after business activity in the U.S. manufacturing sector declined for the second straight month in January and on easing concerns over tight diesel supplies on the global market.

A sharp slowdown in the U.S. manufacturing sector at the start of the year will likely translate into less demand for industrial fuels like diesel and fuel oil, partly offsetting concerns over tight diesel supplies ahead of a European Union ban on Russian product exports. The headline U.S. Purchasing Managers Index registered 46.6 in January, with solid overall contraction reported across industrial and service sectors. Goods producers and service providers recorded similar rates of decline, with service sector firms indicating a notable slowdown in the pace of decrease since December. Companies continued to highlight subdued customer demand and the impact of high inflation on client spending. U.S. diesel demand is highly correlated with the pace of economic expansion.

With that in mind, oil traders will pay close attention to this week's inventory data in the United States, beginning with the American Petroleum Institute report scheduled for 4:30 p.m. EST, followed by official data from the U.S. Energy Information Administration Wednesday morning.

Analysts expect U.S. commercial crude oil inventories to have increased by 100,000 bbl for the week ended Jan. 20, with estimates ranging from a drop of 5 million bbl to a gain of 4.6 million bbl. Gasoline stockpiles are expected to have increased by 1 million bbl from the previous week, while stocks of distillates, which is mostly diesel fuel, are expected to have fallen by 1 million bbl. Refinery use likely increased by 1.4% from the previous week to 86.7% of capacity.

U.S. refiners have been slow to bring back shuttered production caused by the late December blast of brutal cold that froze equipment. In the second week of January, refiners still processed some 1.2 million barrels per day less crude compared to mid-December levels.

Early in the session, oil futures got a leg up from upbeat economic data out of the Eurozone, where business activity returned to positive growth at the start of the year. Business confidence jumped higher, hinting at markedly improving prospects for the year ahead, with order books for both manufacturers and service providers showing reduced rates of contraction.

Within the Euro area, Germany reported only a slight drop in economic output, with the headline PMI rising to 49.7 -- the highest since output began falling last July. Manufacturing output in January declined at the same rate as in December, while services returned to growth with a 50.4 reading.

"A steadying of the eurozone economy at the start of the year adds to evidence that the region might escape recession," commented Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "The survey suggests that a nadir was reached back in October, since when fears over the energy market, in particular, have been alleviated by falling prices and warmer-than-usual weather."

On the back of the stronger-than-expected performance, the German government revised its forecast for economic growth to 0.2% this year from a previously seen contraction of 0.4%. Easing global supply chain issues along with the reopening of China's economy has benefited producers in Germany and helped to restore confidence in the broader economic outlook for 2023.

At settlement, WTI for March delivery declined $1.49 to $80.13 per bbl, and Brent March futures on ICE fell $2.06 to $86.13 per bbl. NYMEX RBOB February contract retreated to $2.6487 per gallon, down $0.0478, and front-month ULSD futures tumbled $0.1237 to $3.4272 per gallon.

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