Crude Oil Recovers as China Injects Liquidity and Geopolitical Tensions Escalate

Crude oil prices recovered modestly in European session as escalated tensions between Turkey and Syria raised concerns over oil supply. Market sentiment was also lifted as China injected RMB 265B to the public via reverse repo operation. In the Eurozone, ECB President Draghi spoke before the European Parliament, expressing that the bloc's facing downside risk on the economic outlook due to financial market tensions. Meanwhile, he said that the central bank welcomes the proposal for a Single Supervisory Mechanism (SSM) and participation of non-EU members in the SSM.

Concerning Middle East tensions, conflicts between Turkey and Syria heightened after Turkey was reported to have bombarded Syrian army positions yesterday. Turkish President Abdullah Gul said that "The worst-case scenarios are taking place right now in Syria". Escalated tensions between Turkey and Syria raised concerns over oil supply. Meanwhile, spread between WTI and Brent crude widened to the highest level since October 2011 as delays of Forties cargoes continued to affect supply.

After China's PMI data showed the second consecutive month of contraction in the manufacturing sector, the PBOC injected RMB 265B into the money market today through reverse report. The size is the second largest as the central bank strikes to ease monetary conditions and boost economic growth. In an article written for China Finance magazine, PBOC Governor Zhou Xiaochuan stated that "the external environment for our country's economic growth is very grim" and the impact from the international finance crisis is unabated and strengthening, and downward pressure on the domestic economy remains relatively big". Therefore, the central bank pledged to make stimulus to the economy "more preemptive, targeted and effective", while "keeping the continuity and stability in monetary policy".

In the Eurozone, ECB President Draghi remained cautious about the outlook. He stated that, while things have "improved in the last to two or three months", the road to recovery remains "still long and it is uphill". Regarding sovereign problems which remained especially difficult in peripheral economies, Draghi noted "it is without doubt that the process of fiscal consolidation in the short term will depress and has depressed outputs in different parts of the Euro area". However, he stressed fiscal consolidation at the national level would help restore growth.

On the dataflow, UK's manufacturing sector weakened further. Industrial production slipped -1.2% y/y in August, compared with July -0.8% and consensus of -1.1% while manufacturing production contracted -1.2% during the month, worsening from July's downward revision of 7%. UK's trade deficit widened to 9.8B pound in August from 7.3B pound a month ago. Oil and Gold Reports contributed by Oil N' Gold.