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Oil Pulls Back as China Moves to Tamp Down Coal Prices

Oil futures pulled back from multiyear highs Wednesday, feeling pressure as China moved to bolster the nation’s coal supplies and as traders await official weekly figures on U.S. crude inventories after industry data showed a rise.

West Texas Intermediate crude for November delivery fell 76 cents, or 0.9%, to $82.20 a barrel on the New York Mercantile Exchange, a day after posting the highest close for a front-month contract since October 2014. December WTI the most actively traded contract, was down 86 cents, or 1%, at $81.58 a barrel.

December Brent crude the global benchmark, fell 86 cents, or 1%, to $84.22 a barrel on ICE Futures Europe, after trading Wednesday at a three-year high.

China’s top economic planner this week vowed to use “all necessary means” to roll back record coal prices, The Wall Street Journal reported, including domestic laws that let the government limit profit and prices for essential goods. It also ordered all coal mines to operate at full capacity, including during holidays, approved new mines and ordered major coal production bases in north and northwestern China to lower prices by 100 yuan a metric ton beginning Tuesday.

“If Chinese regulators artificially force coal prices lower, there will be less fuel switching,” said Robert Yawger, executive director of energy futures at Mizuho Securities, in a note.

Soaring coal and natural-gas prices helped drive crude to recent highs as coal- and gas-fired power generators, particularly in Asia, began switching to oil.

The distillate part of the barrel — refined products including gas oil, heating oil, kerosene, jet fuel and diesel fuel — would be particularly vulnerable to China’s coal plan, Yawger said.

“If coal prices are kept at artificially low prices, then switching to heavy distillates for power generation may not happen at the rate at which many of the world’s most reliable bean counters may have thought,” he said.

If crack spreads — the difference between the price of a barrel of crude and the products that can be refined from it — continue to slide, “refiners may feel less inclined to crank up the refinery utilization rate. The lower the run rate, the less crude-oil refiners will need to buy to make more product.”

Meanwhile, the American Petroleum Institute reported late Tuesday that U.S. crude supplies rose by 3.3 million barrels for the week ended Oct. 15, according to sources. The API reportedly showed inventory declines of 3.5 million barrels for gasoline and 3 million barrels for distillates.

Crude stocks at Cushing, Oklahoma, the delivery hub for Nymex futures, edged down by 2.5 million barrels for the week, sources said.

More closely followed inventory data from the Energy Information Administration will be released Wednesday morning. On average, the EIA is expected to show crude inventories up by 2 million barrels, according to a survey of analysts conducted by S&P Global Platts. The survey also calls for supply declines of 2.2 million barrels for gasoline and 2.4 million barrels for distillates. 

Source: Marketwatch