Oil falls as drop in China industrial profit signals weak demand

[SINGAPORE] Oil halted its advance near US$45 a barrel as a drop in Chinese industrial companies' profits signaled demand may be weakening in the world's second-biggest consumer.

West Texas Intermediate futures fell as much as 1.2 per cent after climbing 2.3 per cent last week. China's industrial profits dropped 8.8 per cent last month, the most in at least four years, while measures of its factory output and US nonfarm payrolls data are due later this week. US crude stockpiles are still almost 100 million barrels above the five-year average for this time of the year even after dropping for two straight weeks.

Crude's rally from a six-year low in August is sputtering amid speculation a global glut will be prolonged as the Chinese economy is slowing while Iran prepares to boost exports amid progress on an accord to lift sanctions against Opec's fourth- biggest producer.

"People are quite concerned about the Chinese market," Emori Capital Management Inc. President Tetsu Emori said by phone. "For the last several weeks, the fairly negative performance of crude prices has been driven by China's demand slowing." WTI for November delivery slid as much as 55 cents to US$45.15 a barrel on the New York Mercantile Exchange and traded at US$45.32 at 12.41pm Singapore time.

Prices climbed 1.8 per cent on Friday to US$45.70. The volume of all futures traded was about 51 per cent below the 100-day average. The contract has lost 8 per cent this month.

INDUSTRIAL PROFITS

Brent for November settlement dropped 34 cents, or 0.7 per cent, to US$48.26 a barrel on the London-based ICE Futures Europe exchange. Prices rose 43 cents, or 0.9 per cent, to US$48.60 on Friday, and climbed 2.4 per cent for the week. The European benchmark crude traded at a premium of US$2.93 to WTI. The contract has lost 16 per cent this year.

Chinese industrial profits tumbled the most since the government began releasing the monthly information in October 2011, according to data compiled by Bloomberg.

The drop was attributed to falling product prices, lower investment returns and foreign exchange losses, the National Bureau of Statistics said in an analysis on the agency's website.

"The market's still in an adjusting process and seeing what the world economy is going to do," Jonathan Barratt, chief investment officer at Ayers Alliance Securities in Sydney, said by phone.

Oil explorers idled rigs for a fourth week, conserving cash as creditors increased scrutiny of producers' balance sheets during a prolonged market slump. The latest round of credit line reevaluations is under way, and almost 80 per cent of oil and natural gas producers will see a cut in the maximum amount they can borrow, according to a survey by the law firm Haynes and Boone LLP.

Money managers' long position in WTI climbed by 6.1 per cent in the week ended Sept 22, the most since January, according to data from the Commodity Futures Trading Commission. The jump in longs and a decline in shorts boosted their net-long position by 15 per cent.

BLOOMBERG