Bloomberg News

Oil Tumbles the Most in Four Weeks on Saudi Output, Economy

June 10, 2011

June 10 (Bloomberg) -- Crude oil tumbled the most in four weeks after the al-Hayat newspaper reported Saudi Arabia will raise oil production to 10 million barrels a day next month, and on concern the global economic recovery is slowing.

Oil declined 2.6 percent as London-based al-Hayat cited unidentified senior OPEC and industry officials as the sources of the Saudi output plan. China reported a smaller-than- estimated trade surplus today. India’s industrial output growth eased in April and U.K. manufacturing dropped.

“The expressed intent of the Saudis has been to make up for the missing Libyan barrels and to cap oil prices,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “In addition to the Saudi news, most economic indicators have been looking terrible.”

Crude oil for July delivery declined $2.64 to settle at $99.29 a barrel on the New York Mercantile Exchange. It was the biggest drop since May 11. Prices fell 0.9 percent this week and are 32 percent higher than a year ago.

Brent crude for July delivery decreased 79 cents, or 0.7 percent, to $118.78 a barrel on the London-based ICE Futures Europe exchange.

A rebellion against Libyan leader Muammar Qaddafi has cut production in the North African country by almost 90 percent, according to Bloomberg estimates.

“An increase in Saudi output has been widely expected, but the size hasn’t been announced,” said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania. “The market is interested in any sign of how much they will boost output.”

‘Worst Meeting’

The report comes after the 12-member Organization of Petroleum Exporting Countries failed this week to agree on output in what Saudi Oil Minister Ali al-Naimi said was “one of the worst meetings” ever. Futures topped $100 a barrel after the decision and al-Naimi said Saudi Arabia was “committed to supplying the needs of the market regardless of the disagreement.”

Saudi Arabia will increase oil production, though it is too early to say by how much, according to a Saudi industry official with knowledge of the matter. The country is still assessing demand, the person said, declining to be identified because he isn’t authorized to speak for the government.

“It’s starting to sink in that the Saudis intend to do what they said and will increase oil production,” said Rick Mueller, a principal with ESAI Energy, LLC in Wakefield, Massachusetts. “This will ease any supply worries.”

Trade Surplus

China reported a $13.1 billion trade surplus in May, as export growth slowed. Inbound shipments rose 28 percent from a year earlier and exports gained 19 percent, the customs bureau said on its website. A $19.3 billion surplus was expected, according to the median estimate in a Bloomberg News survey.

India’s output at factories, utilities and mines rose 6.3 percent from a year earlier in April after an 8.8 percent gain in March, the Central Statistical Office said in a statement in New Delhi today.

China and India are the world’s second- and fourth-biggest oil-consuming countries, responsible for 14 percent of global demand in 2010, according to BP Plc, which published its Statistical Review of World Energy on June 8.

The Standard & Poor’s 500 Index dropped 1 percent to 1,276.14, and the Dow Jones Industrial Average declined 132.34 points to 11,992.02 at 3:36 p.m. in New York. The euro was down 1.1 percent at $1.4344 after dropping to $1.4323, the lowest level since June 2.

‘Across the Board’

“The market is under pressure across the board,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “We came in this morning to negative economic data from China and then had the al-Hayat report. Both the stock market and euro are moving lower, which are negative for oil.”

The euro fell against the dollar as European Central Bank President Jean-Claude Trichet signaled a slowing pace of interest-rate increases. A stronger U.S. currency reduces the appeal of commodities to investors.

Brent, the European benchmark contract, traded at a record $19.49 premium to U.S. futures today. The spread between the two grades has climbed from $3.29 at the beginning of the year as the Libyan rebellion curbed global supplies of light, sweet crude, or oil with low density and sulfur content.

Equipment problems and planned maintenance are expected to curb production at the Buzzard oil field in the North Sea until the end of July, according to Calgary-based operator Nexen Inc.

“The Libyan disruption has been a major reason for the Brent premium,” Mueller said. “Maintenance at the Buzzard field has both reduced the amount of Brent oil and increased its quality, adding to its price. We also have too much oil at Cushing, depressing the price of WTI.”

Cushing Inventories

Supplies of oil at Cushing, Oklahoma, the delivery point for the New York-traded West Texas Intermediate grade, rose to 41.9 million barrels in the week ended April 8, the highest level since at least 2004, when the Energy Department began tracking stockpiles at the hub.

“WTI is getting hit more than Brent because of the storage issue in Cushing,” said Ray Carbone, president of Paramount Options Inc. in New York and a trader at the New York Mercantile Exchange.

Oil volume in electronic trading on the Nymex was 720,580 contracts as of 2:38 p.m. in New York. Volume totaled 839,094 contracts yesterday, 27 percent above the average of the past three months. Open interest was 1.53 million contracts.

--With assistance from Caroline Alexander and Anthony DiPaola in London, Wael Mahdi in Cairo and Barbara Powell in Dallas. Editors: Joe Link, Dan Stets

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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