Oil Dips, Spooked by U.S. Economic Data; Strong Weekly Gains Though

15 Mar 2019

Oil Dips, Spooked by U.S. Economic Data; Strong Weekly Gains Though

Forget China's growth, for now -- the U.S. might be a bigger problem as New York manufacturing data showed on Friday, casting more economic worries for oil.

Both U.S. West Texas Intermediate crude and U.K. Brent oil dipped to a slightly lower close after the Empire State Manufacturing Index slumped to a reading of 3.70 for March, its third consecutive monthly reading below 10 and the lowest since May 2017.

The unexpected drop in manufacturing activity in the New York area, the bellwether of the dynamic U.S. East Coast, rippled across markets as it was another sign that the world's largest economy might be weakening as the effects of President Donald Trump's 2017 tax cuts fade. Worries about Washington's prolonged trade dispute with China and how that is impacting U.S. growth also spooked investors.

While concerns over the Empire State manufacturing data pushed oil to a lower settlement, crude prices still posted strong gains for the week.

WTI settled down 9 cents, or 0.2%, at $58.52 per barrel, after hitting a 2019 high of $58.95 earlier. For the week, the U.S. crude benchmark rose 4.4%.

Brent, which had broken away from WTI's four-day rally on Thursday, fell for a second straight session, sliding 18 cents, or 0.3%, to $67.05 by 3:21 PM ET (19:21 GMT). The U.K. crude benchmark remained on track to a 2% gain on the week.

WTI's outperfomance against Brent and the narrowing gap between the two has become one of the biggest plays in the oil market this week. Until last week, Brent had steadily retained a premium of $10 a barrel or so against its U.S. peer.

But in recent days, the difference had dwindled to below $8.50 after the U.S. Energy Information Administration shocked the market this week by announcing a crude stockpile drop of nearly 4 million barrels versus an expected build of 2.7 million. Inventories at the Cushing, Okla. storage hub for WTI also fell last week by 5.4 million barrels.

"A lack of builds recently has created optics that have the Cushing bears on the run for the time being and generating a WTI/Brent rally that can do whatever it wants, as the U.S. grade will adjust to make WTI/Brent 'just a number'," said Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, North Carolina.

With two weeks to the end of the first quarter, WTI is up 29% on the year and Brent 25%, with both benchmarks benefiting extensively from aggressive production cuts carried out by OPEC since the start of January.

Friday's losses in crude were limited by the revised upward forecast of $70 for a barrel of Brent by Goldman Sachs (NYSE:GS), one of the most influential voices on Wall Street for oil market forecasting.

The Paris-based International Energy Agency also helped sentiment by predicting that global oil supply could be in deficit of some 500,000 barrels per day by the second quarter, eliminating the modest surplus expected for the first quarter.

A fresh slide in the U.S. oil rig count this week was another positive factor for crude, although the drop was just one rig. Oil services firm Baker Hughes put its latest reading for oil rigs at a new 10-month low of 833 units, compared to the previous week's 834. A lower rig count indicates less oil production in the future, which when combined with OPEC's output reductions, could help WTI rally faster.

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