Oil Prices Retreated After Last Weeks Surge

Oil prices retreated 1.4% Monday as the euphoria over last week’s European Union plan faded and poor manufacturing data from the U.S. and China came into focus.

Analysts said the price drop was probably inevitable after Friday’s surprising surge, which saw oil prices leap 9.4%. The move was fueled by enthusiasm over European leaders agreeing to use bailout funds to directly aid Spanish and Italian banks.

“The move on Friday was extremely exaggerated,” said IAF Advisors Managing Partner Kyle Cooper.

Monday’s trading is “somewhat of a hangover from what we saw,” said Stephen Schork, head of the Schork Report, an energy research note.

Light, sweet crude oil futures settled at down $1.21 at $83.75 a barrel for August delivery on the New York Mercantile Exchange.

Brent futures settled at $97.34, down 46 cents.

Sagging manufacturing data also suggested weak oil demand.

The U.S. manufacturing sector contracted in June for the first time since July 2009, according to the Institute for Supply Management. The unexpectedly weak report sent fears about future economic growth through the financial markets.

The ISM’s manufacturing purchasing managers’ index plunged to 49.7 last month from 53.5 in May. A reading above 50 indicates expanding activity.

Earlier, manufacturing data from China also suggested stunted growth. The HSBC China Manufacturing Purchasing Managers Index fell for the eighth-consecutive month, to 48.2, compared with 48.4 in May, HSBC Holdings PLC said Monday. The official manufacturing PMI in June also fell to 50.2 from 50.4 in May, the China Federation of Logistics and Purchasing said Sunday.

Mr. Cooper characterized the U.S. manufacturing data as “very weak.”

Early in the session, oil prices rallied briefly after reports surfaced that Iranian lawmakers have drafted a bill to block the Strait of Hormuz for oil tankers from states that support oil sanctions.

But the jump was short-lived.

“It’s only a draft,” said Tony Rosado, an oil options analyst and broker at GA Global Markets. But if Iran takes more concrete action in the strait, an important waterway for oil, “then I think people will have to take it more seriously,” Mr. Rosado added.

Given the poor manufacturing numbers and persistent weak oil demand, analysts said further declines in oil prices are possible in the days ahead.

Yet after Friday’s surge, some energy insiders are loathe to bet on oil prices receding too much.

John Kilduff, trader with Again Capital, said a weak jobs report this Friday could spur additional selling. But he doesn’t see much chance of oil slipping into the $60s, as some had been discussing prior to Friday.

“I don’t think you can get crazily bearish,” said Mr. Kilduff.

Front-month reformulated gasoline blendstock, or RBOB, settled $2.619 a gallon, down 1.23 cents. Heating oil settled at $2.675 a gallon, down 3.5 cents.