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Crude oil futures retreat from multi-year highs on weak US, China economic data

Crude oil futures retreated further from multi-year highs in mid-morning trade in Asia Oct. 19 after a mixed overnight session, with sentiment bruised by a slew of reports suggesting that the global economic recovery was slowing down.

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At 10:30 am Singapore time (0230 GMT), the ICE December Brent futures contract was down 4 cents/b (0.05%) from the previous close at $84.29/b, while the NYMEX November light sweet crude contract fell 5 cents/b (0.06%) at $82.39/b.

Investor confidence took a hit overnight after data showed US industrial production fell by 1.3% on the month in September, much weaker than the expected 0.1% rise. In addition, China's economy grew by a relatively paltry 4.9% in the third quarter from a year earlier, down from a 7.9% growth in the second quarter.

The weak economic data contributed to both contracts pulling back overnight from multi-year highs to end the day mixed. The front-month ICE Brent contract settled lower by 53 cents/b from a three-year high reached earlier in the session, while the front-month NYMEX crude contract settled up 16 cents/b, retreating from a seven-year high intra-day.

"The US industrial/manufacturing slowdown in September was a lot greater than anyone anticipated. Higher commodity prices, prolonged shutdowns in activity due to hurricane season, and the global chip shortage are having a greater impact on the economy," said OANDA Senior Market Analyst Edward Moya.

"This weakness has continued in early morning trading today. A fall in US industrial production in September would have not helped sentiment, along with weaker GDP numbers from China," said ING analysts Warren Patterson and Wenyu Yao in a note.

While most analysts believe the near-term outlook for crude prices remains bullish, there are signs US production is beginning to ramp up as producers respond to the quick run-up in prices over 2021.

The US Energy Information Administration said Oct. 18 in its monthly Drilling Productivity Report that US shale oil production is estimated to jump by 76,000 b/d to 8.2 million b/d in November, poised to be the biggest month-on-month gain this year.

The bulk of projected activity increases for the month ahead stem from the Permian, which is set to rise 62,000 b/d in November to 4.88 million b/d, Jozef Lieskovsky, chief analyst on the DPR, said during a monthly EIA webcast. It would be the West Texas/New Mexico's biggest monthly gain this year.

Recent weather reports have pointed to a warmer-than-expected weather in the US and Europe for the rest of October, likely putting a further dampener on oil demand, though the long-term forecast for the next few months still indicate a colder-than-expected winter.

"A couple weeks of warm weather will not change the oil market deficit that is in place, but it will make it a little harder for Brent crude to hit the $90 level. Crude prices could consolidate around the $80 level, with the $78 level providing modest support," OANDA's Moya said.