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Chinese manufacturing data slashed crude – will oil also react to Fed?

Lower than expected PMI number from the biggest crude oil consumer, China, negatively affects the price of the commodity.

Manufacturing data in China

The latest PMI data from China slid from previous numbers. The manufacturing purchase managers index (PMI) and the non-manufacturing index released lower numbers compared with the previous month. PMI index fell under the level of 50, which is considered a shrinking economic activity. The current number is 49.2, while the previous month was 51.9. Non-manufacturing index wrote 56.4 which is lower by 1.8 points from 58.2 in March. 

We have informed you about this topic: Oil´s earnings week is here – so is volatility

The problem of the contraction of the Chinese PMI is low activity in factories and demand for Chinese exports. Despite the fact, that the government´s spending to boost economic activity is enormous, PMIs persist narrow. And the question is: “Is it sustainable?” 

A rise in services is not enough

Lower PMI shows a decline in manufacturing and lower activity in factories. On the other hand industry with services is on the top. The rise of spending in this sector of the economy is significant. Banks´ forecasts for this year are around 6%. But a rise in services is not enough. Moreover, the services rise inside China among its citizens. But lower world demand for goods from China is something else. And could be a sign of future problems. 

Read more: The end of April marks a turbulent month full of earnings

China is one of the biggest crude oil consumers, and the price of the commodity is tightly connected with the state of economic activity of this Asian country. A narrower PMI did not send a good signal and crude oil plunged. April ended in negative territory and the first day of May continues in this trend. 

Crude oil plunges

Crude oil erased -4.33% in April with open at $80.10 and close at $76.63. More important could be the volatility, where the high/low range represents -11.49%, with a high at $83.53 and a low at $73.93. The big question mark about higher demand from China for crude oil brought nervousness and volatility as we can see on the chart below. 

1 hour chart of CL (Crude Oil Futures contract). Monthly volatility in April. Source: Author's analysis

1 hour chart of CL (Crude Oil Futures contract), source: Author’s analysis

Fed is next

Federal reserve meeting will occur on the 3rd of May and the importance of the fundament can easily move with the strength of the US dollar. Crude oil is denominated in the USD, so any surprise moves on the side of the Fed could be easily monitored to the price development of the black gold. The interest rate hike by 25 bps is the most awaited scenario. Inflation does not decline as much as central bankers want, so the question is: “Are the steps of the US monetary policy good enough to fight inflation significantly?” 

Tomas is a professional trader and money manager on foreign exchange market from 2014. His main domain are commodities. Experiences gained due this period are transformed to consul...

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