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Crude oil ends sharply lower as supply-glut fears return

Oil futures ended sharply lower Tuesday as renewed fears of a global glut hit investor confidence ahead of weekly inventory data that are expected to show an increase in crude supplies.

West Texas Intermediate crude oil CLM6, +0.23%  lost $1.13, or 2.5%, to end at $43.65 a barrel on the New York Mercantile Exchange, while Brent oilLCON6, +0.16%  dropped 86 cents, or 1.9%, to finish at $44.97 a barrel on London’s ICE exchange.

Both benchmarks fell for a third straight day, with investors taking profits on a sharp rally that had taken crude to levels last seen in November. News reports pointing to talk of increased production by members of the Organization of the Petroleum Exporting Countries in April have weighed on oil.

Matt Smith, director of commodity research at ClipperData, said supply-demand concerns re-emerged after the world’s second largest economy released a disappointing manufacturing report.

A private gauge of nationwide factory activity—China’s Caixin manufacturing PMI—fell to 49.4 in April from 49.7 in March, missing analyst forecasts and marking the 14th decline in factory activity in a row. Readings below 50 indicate contraction.

“It’s just one more sign of potential slowing coming from China,” Smith said.

“We’re seeing some losses again today adding to the reversal after recent highs and I think what really has caused this selloff is weak data out of China Caixin PMI manufacturing, which shows contraction,” he added.

At least part of the slide was sparked by worries that crude’s recent rally could encourage producers, notably North American shale producers, to crank out more oil, which also is putting pressure on prices.

“Oil looks to have topped out, because we’re getting quite near to that level where we might see fracking come out again, so I think people are taking profits on that,” said Augustin Eden, research analyst at Accendo Markets.

The “fracking” technique is primarily used in the U.S. as an effective, but expensive way of extracting oil from dense rock or sand where traditional drilling falls short. After oil prices started to nosedive, fracking producers were some of the hardest hit, because their production costs are higher than for other parts of the oil industry.

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This also means that as oil prices start to rise, fracking could become profitable again, enticing more producers to come back online and increase output in a market that is already struggling with a supply glut.

Fawad Razaqzada, market analyst at Forex.com and City Index, said crude’s rally has led some to momentarily forget the oversupply issues that have dogged crude markets for months, despite the inability of major producers to agree to a production freeze.

“Oil prices have also been absorbing a lot of negative news lately and completely ignoring the fact the markets remain oversupplied with U.S. crude oil inventories being at and record-high levels,” Razaqzada said in a Tuesday research note.

“So, the pressure for a squeeze was building anyway. Iran is continuing to increase oil output following an end to its sanctions in January; Saudi Arabia, unwilling to lose market share to Iran, produces near record levels and Iraqi oil production is at 30-year highs,” he said.

An early reading on U.S. output from the American Petroleum Institute, an industry trade group, comes late Tuesday, followed by the more closely watched Energy Information Administration, which releases its weekly inventory data Wednesday. Asurvey compiled by Bloomberg forecast an increase of 500,000 barrels in stockpiles last week.

Reports said on Monday that energy data provider Genscape reported a weekly climb in crude stockpiles of more than 800,000 barrels at Cushing, Okla.

Elsewhere in the energy spectrum, gasoline for June delivery RBM6, +0.82%  lost 5.28 cents, or 3.4%, to finish at $1.51 a gallon, while June natural gasNGM16, -0.86%  jumped rose 4.4 cents, or 2.2%, to end at $2.086 per million British thermal units.

June heating oil HOM6, +0.51%  lost 2.21 cents, or 1.6% to end at $1.3334 a gallon.

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