Crude oil prices slipped in early trade Monday in Asia on receipt of gloomy news from China. The Caixin China Manufacturing Purchasing Managers Index for October was 48.3 in October which was actually an increase from September’s 47.2. However, any figure below 50 shows contraction while above 50 shows expansion.
Eighth Month In Succession
This now means that the Chinese economy has slowed for the eighth month in succession, but just not quite so fast as earlier. According to He Fan, Caixin Insight Group chief economist, the slight move upwards indicates that the rate of weakening of the economy, although still slowing, would seem to show that the measures taken by Beijing earlier in the year are now beginning to take effect. The central bank has cut interest rates six times in the last 12 months.
It is possible that small and medium sized businesses are beginning to see some light at the end of the tunnel, since the Caixin Index gives more weight to smaller businesses, particularly those involved in export.
Chinese Government Index
By contrast, China’s official government index, which gives more weight to large state-owned businesses, was released on Sunday and was at a lower than expected 49.8. This is the same figure as September, and is still in negative territory. It would suggest that heavy manufacturing and production will continue to slow down for some while, before turning the corner. Obviously, this means that there is less demand for oil at the present moment.
Drillers Keep Drilling
Combined with lower requirement in China is the fact that global stocks are still outstripping demand while drillers keep drilling. According to oil services company Baker Hughes, another 16 rigs went out of production last week in the US, bringing the total in production down to 578, yet as one analyst noted, the only thing oil companies know how to do is to pump oil. “They simply keep getting more with less,” he commented. He added, as an example, that one company had drilled an 18,000 feet well and brought it into production in 24 days very recently, where the normal timescale for a well of that depth would have been a minimum of two months.
Another analyst, at National Australia Bank, Vyanne Lai, said that their view is that US crude production will not begin to slow until the second half of 2016 at the earliest.
The US Energy Information Administration is due to produce production and stocks figures on Wednesday, while the US non-farm payrolls report is due on Friday.