Crude drops nearly 3% as U.S. refineries strike, China data sluggish

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Strikes could trigger higher inventory builds

The last thing the oil market needs?

Crude-oil futures fell about 3% in Asian trade Monday on strikes at U.S. refineries and sluggish manufacturing data from China.

On the New York Mercantile Exchange, light, sweet crude futures for March delivery CLH5, -2.28%   traded at $46.95 a barrel, down $1.24 in the Globex electronic session. Nymex crude lost 9.4% last month and has been down for seven consecutive months.

Brent crude for March delivery LCOH5, -1.79%  fell $1.31, or 2.5%, to $51.60 a barrel on London’s ICE Futures exchange. The global oil benchmark lost 7.6% in January and has also fallen for seven consecutive months.

Workers represented by the United Steelworkers union at U.S. refineries that produce nearly 10% of the nation’s gasoline, diesel and other fuels went on strike Sunday after contract negotiations broke down over salaries and safety concerns. The union said the strike affects 3,800 workers.

Oil refiners like Royal Dutch Shell PLC. RDS.A, -1.38%  , RDS.B, -1.40%  Tesoro Corp. TSO, +1.60% Marathon Petroleum Corp. MPC, +2.87% and LyondellBasell Industries LYB, +1.70%  said they would keep plants operating under contingency plans.

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However, oil markets were concerned that any reduction in refining capacity could cut consumption and allow supplies to build even more after inventories touched record highs in recent weeks.

China data disappoints: Oil prices were also pressured by data showing China’s manufacturing sector slipped into contraction in January, indicating a slowdown in the country’s economy.

The HSBC China manufacturing purchasing managers index inched up to 49.7 for January from 49.6 in December, HSBC said Monday. The data came a day after China’s official PMI dipped to 49.8 for January, the first reading below 50 since 2012. A reading below 50 indicates a contraction.

“[Today’s] disappointing PMI readings mean that a sustained recovery in industry now appears less likely,” economist Julian Evans-Pritchard at Capital Economics said.

Oil rose sharply on Friday, posting an 8% gain in the trading session, the largest one-day percentage gain for Brent crude since April 2009. The increase was supported by another sharp decline in the number of drilling rigs deployed in the U.S.

Drilling rigs in North America may fall by 30% to 40% this year, along with spending cuts of a similar magnitude among oil companies, which should support a recovery in oil prices by the end of the year, Gordon Kwan, head of oil research at Nomura, said in a note to clients.

“We estimate a 15%-20% drop in U.S. [oil] production will eliminate the global oversupply of 1.5-2 million barrels a day,” Mr. Kwan said.

Nymex crude is likely to consolidate with risks skewed to the upside near-term after settling up $3.71 at $48.24 a barrel Friday, Dow Jones technical analysis shows.

Nymex reformulated gasoline blendstock for March –the benchmark gasoline contract–fell 1.5% to $1.4563 a gallon, while March diesel traded at $1.6788, 220 points lower.

ICE gasoil for February changed hands at $497.25 a metric ton, up $19.00 from Friday’s settlement.

 

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