DTN Oil

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange eroded more than 2% Tuesday under pressure from a rallying U.S. dollar. The dollar spiked on stronger-than-expected macroeconomic data in the United States that showed both services and manufacturing sectors of the economy returned to expansion at the start of the fourth quarter.

West Texas Intermediate and Brent futures continued lower for the third consecutive session under pressure from a stronger U.S. dollar and receding risk of a broader conflict in the Middle East amid reports suggesting the Israeli government is reconsidering a large-scale ground offensive in the Gaza Strip.

On the macroeconomic data front, U.S. companies in the manufacturing and services sectors of the economy jumped above 50 in October following broadly stagnant output seen in August and September, according to data released this morning from S&P Global. Manufacturers and service providers alike reported improved activity levels as the downturn in demand moderated. The rise in total output was the quickest for the three months.

"Hopes of a soft landing for the U.S. economy will be encouraged by the improved situation seen in October," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "The S&P Global PMI survey has been among the most downbeat economic indicators in recent months, so the upturn in U.S. output growth signaled at the start of the fourth quarter is good news."

In reaction to the data, the U.S. dollar spiked 0.7% against a basket of foreign currencies to settle at 106.080 as investors repriced the strength of the U.S. economy and a potential for more rate hikes from the Federal Reserve in coming months. CME FedWatch Tool shows increased odds for a 0.25% hike in the federal funds rate at the Federal Open Market Committee's meeting in December.

Moving in the opposite direction, macroeconomic data out of the Eurozone revealed a steepening contraction in both the services and industrial sides of the economy. S&P Platts Tuesday morning reported Eurozone economy contracted at the fastest pace in over three years this month, with the loss of new orders and cutbacks on employment accelerating at the start of the fourth quarter.

"In the Eurozone, things are moving from bad to worse," said Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. "Manufacturing has been in a slump for 16 months, services for three and both PMI headline indices just took another hit."

Looking deeper into the data, Germany and France are pretty much neck-and-neck when it comes to a downturn in energy-intensive manufacturing. Both countries are struggling with contraction in output indices while there's a similar picture for new orders.

Also on Tuesday, oil traders positioned ahead of the weekly inventory report from the American Petroleum Institute scheduled for 4:30 p.m. ET, followed by official inventory data from the U.S. Energy Information Administration on Wednesday morning.

A consensus of 10 analysts and traders surveyed by Wall Street Journal showed commercial crude stockpiles rose by only 10,000 bbl for the week ended Oct. 20. Gasoline inventories are expected to have decreased by 300,000 bbl, while stocks of distillates are seen declining by 1.1 million bbl. Refinery use likely increased 0.5% to 86.6% of capacity.

At settlement, NYMEX WTI futures for December delivery moved $1.75 lower to $83.74 bbl while Brent December futures on ICE declined $1.76 to $88.07 bbl. NYMEX November ULSD futures dropped $0.0506 to $3.0449 gallon, while front-month RBOB futures fell $0.0609 to $2.2676 gallon.

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