Crude Oil Weakens on Prospect of Lower Chinese Demand

Short-term overbought technical conditions and renewed selling pressure after the market failed to follow-through to the upside, following last week’s strong gains helped pressure October crude oil futures on Monday.  

Sellers came in early in the session on renewed concerns over the global supply glut on fresh concerns over demand from China. Traders were reacting to the news that the Chinese government placed a 16 trillion yuan ($2.506 trillion) cap on local government debt over the week-end. This move and last week’s stimulus package represent Beijing’s response to the slowing economy.

Traders primarily ignored a report from the U.S. Energy Information Administration on Monday that lowered a monthly estimate on domestic crude oil production. The EIA estimated June U.S. crude oil output at 9.3 million barrels a day, down about 100,000 barrels a day from the revised May figure.

Hawkish comments from Fed Vice Chair Stanley Fischer set the tone for the U.S. Dollar, gold, Euro and British Pound. Speaking to CNBC on Friday and central bankers at the Jackson Hole symposium on Saturday, Fischer said that the Fed is aware of the recent market volatility, but that its primary focus is on the labor market and inflation. He further added that there is “good reason” to think sluggish U.S. inflation will firm.

Fisher also said that the Fed is still on track to raise interest rates in 2015, which puts the emphasis on Friday’s U.S. Non-Farm Payrolls report. Stronger-than-expected jobs data will likely move the timeline for a rate hike.

The U.S. Dollar strengthened on Fischer’s comments after early session weakness. The EUR/USD fell on renewed interest in the U.S. Federal Reserve/European Central Bank monetary policy divergence as investors increased slightly the possibility of a September rate hike. In other news, German Retail Sales were up 1.4% versus the previous month’s 1.0% loss. The Euro Zone CPI Flash Estimate and Core CPI Flash Estimate both came in as expected at 0.2% and 1.0% respectively.

There was no economic news out of the U.K., but investors did react to comments from Bank of England Governor Mark Carney. He said basically the same thing that the Fed’s Fischer said about the possibility of raising rates. Both agreed that an interest rate hike would be data dependent and not subject to volatile market conditions.

December Comex Gold futures weakened on the prospect of an interest rate hike and in reaction to the stronger dollar. Finally, the Chicago PMI report showed a reading of 54.4, which was slightly below the 54.7 estimate.