US Crude Slips Below Key $30 Level

US crude continues to drop this week, as March futures are trading just above $30 a barrel in Tuesday’s North American session. Brent crude futures are currently trading at $32.98 per barrel. In economic news, there are no major US events on the schedule. The IBD/TIPP Economic Optimism report posted a reading of 47.8 points, matching the forecast.

It hasn’t been a good start to the week for US crude, as WTI/USD is down 1.1%, just above the symbolic $30 level. Oil prices briefly fell below the $30 level on Tuesday, and there is room for the commodity to fall lower, as supply continues to far exceed demand. US Crude softened on Monday, 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 hike 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)

• 10:00 US IBD/TIPP Economic Optimism. Estimate 47.8 points. Actual 47.8 points
• All Day – US Total Vehicle Sales. Estimate 17.4M
• 13:00 – US FOMC Member Esther George Speaks

*Key releases are highlighted in bold

*All release times are EST

WTI/USD for Tuesday, February 2, 2016

WTI/USD February 2 at 10:45 EST

Open: 31.62 Low: 29.81 High: 31.62 Close: 30.37

WTI/USD Technical

• WTI/USD has been marked by downward movement during the day.
• 30.00 was tested earlier in support and is under strong pressure. Will this line break during the North American session?
• 32.22 has some breathing room as the pair trades at lower levels.

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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