ICE Brent Erodes Below $72 as China's PMIs Flash Recession

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange deepened losses in early trade Wednesday, dragged lower by bearish manufacturing data out of China, the world's largest crude-oil importer, showing the nation's industrial activity declined last month to a level consistent with recession amid a flailing post-COVID rebound.

China's economic recovery continues to disappoint, and the manufacturing sector could be facing a "downward spiral," according to the National Bureau of Statistics. Figures released overnight showed manufacturing purchasing managers' index fell deeper into contraction this month to 48.8 from 49.2 in April, while the non-manufacturing gauge also eased to 54.5 from 56.4, although remained in expansionary territory.

At 48.8, China's manufacturing index has now fallen to the lowest level since the end of last year when the national economy was under COVID lockdown. The combination of high youth unemployment, inadequate domestic and international demand along with fractured trade relations with major Western economies are thought to be the main drivers behind recession in China's manufacturing sector.

Calls are getting louder for China's central bank to take action to spur the domestic economy, including cutting interest rates and boosting stimulus for manufacturers and consumers. While that may give financial markets a lift, it's unlikely to provide a meaningful boost to business confidence that relies heavily on external demand for its manufactured goods. It's worth headlining that China is an export-driven, manufacturing-based economy that requires strong demand pull from consumption-led economies like the United States and European Union. Demand rotation from manufactured goods into services that took place across Western economies over the past two years is not going to reverse anytime soon.

Domestically, investors continue to monitor progress on a debt ceiling deal unveiled by President Joe Biden and House Speaker Kevin McCarthy over the weekend and needs to be cleared by U.S. Congress.

At least 20 Republican lawmakers said Tuesday they would vote against the tentative agreement that suspends the debt ceiling debate until 2025. Amid the conservative backlash, Rep. Dan Bishop, R-N.C., became the first lawmaker to call for a "motion to vacate" McCarthy from his leadership role for reaching a deal full of "cosmetic things, artificial things that have been outright lied about and misstated."

Despite the backlash by conservatives and progressives, the debt ceiling deal was approved by the House Rules Committee Tuesday night and could be voted on by the full House as early as Wednesday.

The Dow Jones Industrial Average extended losses into early trading Wednesday as Wall Street assessed the odds for the tentative deal to clear the Congress. Contracts tied to DJIA indicate a 65-point fall at the opening bell, while the S&P 500 softened 0.2% and NASDAQ 100 futures lost 0.1%.

The U.S. Dollar Index, meanwhile, strengthened to 104.430, up 0.34% against a basket of foreign currencies, further pressuring the oil complex.

In early trading, West Texas Intermediate July futures, the U.S. crude benchmark, declined $1.89 to $67.56 barrel (bbl), and international crude benchmark Brent for July delivery shed $1.93 bbl to $71.61 bbl before the contract's expiration this afternoon. Next-month Brent August futures declined $1.69 bbl to $72.04 bbl. NYMEX RBOB June futures plunged 4.44cts gallon to $2.5515, with the next-month delivery contract expanding its discount against the expiring contract to a 11.75cts gallon. NYMEX ULSD June contract declined $0.0331 to $2.2477 gallon and next-month delivery July futures traded near $2.2450 gallon.

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

Liubov Georges