New York — Oil futures settled lower Thursday as demand concerns took center stage amid weaker US economic data.
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NYMEX October WTI settled down 33 cents at $55.35/b and ICE October Brent was down 38 cents at $59.92/b at market close.
Oil prices fell into the red midmorning Thursday on the heels of an IHS Markit report showing the August US manufacturing PMI fell to 49.9 in August, down from 50.4 in July. The index fell below 50, indicating a contraction, for the first time since September 2009.
The weakened business outlook highlighted recession and demand growth fears, but at the same time it may increase the chances of further action from US central bank at its meeting next month. US equity markets slid in the immediate wake of the report but later rebounded in afternoon trading.
A recession scenario could lower global demand growth by 260,000 b/d in 2019 to 930,000 b/d and by 750,000 b/d in 2020 to 660,000 b/d, according to S&P Global Platts Analytics data.
Rate cut expectations did not change significantly after the Fed's July Federal Open Markets Committee minutes released Wednesday. The minutes identified reasons for its July rate cuts as slowing US business spending and manufacturing activity, trade tensions, US inflation outlook as well as "risk management" in a time of tepid economic activity.
The Fed cut its target interest rate by 25 basis points after its July meeting, but Fed Chairman Jerome Powell disappointed markets when he said the move was a "mid-cycle adjustment" and failed to commit to further cuts. Lower interest rates, which fosters increased growth and spending, are typically bullish for commodity prices.
Powell is expected to give further insight into the central bank's viewpoint during a speech on Friday.
Meanwhile, the US Energy Information Administration reported Wednesday that US crude stocks fell 2.73 million barrels for the week-ended August 16. The decline was less than the 3.1 million-barrel draw expected by analysts, according to a survey by S&P Global Platts. Notably, distillate and gasoline stocks were both higher, hinting at a lack of demand growth, analysts said.
NYMEX refined product futures were also lower Wednesday. September ULSD settled down 1.60 cents at $1.8413/gal and September RBOB was 2.63 cents lower at $1.6675/gal.
The September ULSD-RBOB spread widened to 17 cents/gal amid outsized declines in RBOB pricing. Spreads typically widen at this time of year due to a combination of gasoline demand easing with the end of the summer driving season and diesel purchases ramping up ahead of the onset of cooler weather. But the additional influence of imputed distillate demand from International Maritime Organization bunker fuel regulations is exacerbating ULSD premiums. Year-ago September ULSD-RBOB spread averaged around 10.5 cents/gal.
Beginning January 1, 2020, the IMO will implement a global 0.5% sulfur cap for marine fuels, down from the current 3.5%. Demand for distillate fuel, especially marine gasoil with 0.1% sulfur, is expected to rise in the coming months as traders prepare.
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