Crude sinks on taper prospects

Signs of further recovery in the US economy increase the chance of the Fed continuing to reduce its stimulus, which has helped push crude futures to a two-week low.

Crude futures for February had dropped 2.57% to $95.88 a barrel by mid-afternoon in New York today, a third consecutive day of declines in the commodity. The slump in the price of oil came after data showed a fall in jobless claims last week and improvements in the manufacturing sector.

The Institute for Supply Management’s manufacturing index came in at 57 for December, just a touch below November’s 57.3, which was an 18-month high. The final reading of Markit’s manufacturing PMI climbed to 55.0, from 54.7 in November, hitting its highest level since January 2013. Readings above 50 suggest expansion. US construction spending has also been picking up, rising 1.0% in November, after a 0.9% increase in October.

Such improvements in the US economy would seem to pave the way for further tapers by the Fed at forthcoming FOMC meetings, which is supportive for the US dollar. While the improving economy should prove to be a plus for fuel demand, the Fed tightening the stimulus tap is likely to be a negative. The strengthening dollar makes the dollar-denominated oil contracts less attractive to global investors.

The Energy Information Administration releases last week’s oil inventory data tomorrow. A Reuters poll of analysts shows a consensus estimate of a 2.98 million-barrel decline.

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