US Crude Dips as US, Chinese Mfg. Numbers Falter

US crude has started the new trading week with losses, as March futures are trading at $31.88 a barrel in the North American session. Brent crude futures are currently trading at $34.68 per barrel. In economic news, ISM Manufacturing PMI dipped to 48.2 points, and Chinese manufacturing reports also pointed to contraction. Elsewhere, US Core PCE Price Index and Personal Spending both came in with flat readings of 0.0%.

US crude posted an impressive rally last week, as the commodity surged 9.8% and punched past the $36 level. However, the trend has reversed on Monday, with crude trading below $32. Oil prices have softened as US and Chinese manufacturing numbers disappointed. In the US, ISM Manufacturing PMI slipped to 48.2 points, its lowest level since June 2009. This was the second straight reading below the 50-point level, which separates between contraction and expansion. There was no relief from China, the world’s second largest oil consumer after the United States. Two key indicators, Chinese Manufacturing PMI and Caixin Manufacturing PMI, remained below the 50-line, pointing to continuing contraction in the Chinese manufacturing sector. Weaker manufacturing demand means that China continues to cut back on its need for oil, which has been a major contributor to the collapse in global oil prices. Adding to oil’s woes is the return of Iran as an oil exporter as well as high production in North America, Russia and OPEC. There has been some discussion of cooperation between Russia and OPEC, and predictably, these reports boosted oil prices last week. However, absent any concrete announcements of cooperation between oil exporters, these gains turned out to be short-lived.

With the Federal Reserve staying on the sidelines last month and holding rates at 0.25%, market speculation has now shifted to the March policy meeting. Will we see another rate at that time? The Fed probably cannot answer this question just yet, so the markets will have to show some patience. The inflation picture remains problematic, with the Fed saying that inflation levels will remain low and may not reach the target of 2.0% until 2018. Given these Fed’s continuing concerns about a lack of inflation, it’s hard to foresee another rate hike in March, absent a strong improvement in key US indicators. The manufacturing sector is another weak spot in the US economy, as underscored by a weak ISM Manufacturing PMI on Monday. Other December manufacturing numbers were also dismal. Last week, Durable Goods dropped 1.2%, while Core Durables plunged 5.1%, its weakest showing since August 2014. These soft numbers underscore ongoing weakness in the US manufacturing sector, which has not improved despite positive economic conditions.

WTI/USD Fundamentals

Monday (Feb. 1)

• 8:30 US Core PCE Price Index. Estimate 0.1%. Actual 0.0%
• 8:30 US Personal Spending. Estimate 0.1%. Actual 0.0%
• 8:30 US Personal Income. Estimate 0.2%. Actual 0.3%
• 9:45 US Final Manufacturing PMI. Estimate 52.7 points. Actual 52.4 points
• 10:00 US ISM Manufacturing PMI. Estimate 48.6 points. Actual 48.2 points
• 10:00 US Construction Spending. Estimate 0.1%. Actual 0.6%.
• 10:00 ISM Manufacturing Prices. Estimate 34.7 points. Actual 33.5 points
• Tentative – US Loan Officer Survey

*Key releases are highlighted in bold

*All release times are EST

WTI/USD for Monday, February 1, 2016

WTI/USD February 1 at 12:05 EST

Open: 33.61 Low: 31.82 High: 33.62 Close: 31.88

WTI/USD Technical

• WTI/USD was uneventful in the Asian session. The pair posted slight gains in the European session but then retracted, and the downward movement has continued in North American trade.
• The very round number of 30.00 is providing support.
• 32.22 remains busy and has switched to a resistance role. It is a weak line and could see further action in the North American session.

Further levels in both directions:

• Below: 30.00, 26.64 and 22.88
• Above: 32.22, 35.09, 37.75 and 39.87

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