Bloomberg News

Oil Tumbles, Erases 2011 Gains as IEA Members to Tap Reserves

June 23, 2011

June 23 (Bloomberg) -- Oil tumbled in New York, erasing its gains for the year, after the International Energy Agency said its members would release crude from strategic reserves.

Oil fell 4.6 percent as the agency announced the release of 2 million barrels a day for 30 days beginning next week to help make up for a Libyan supply disruption. Commodities and equities dropped after U.S. jobless claims rose and the Federal Reserve cut its economic growth outlook yesterday.

“The big driver is the IEA number,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “There’s been a constant string of negative news about the economy and a lack of direction from Washington, which makes for a very volatile market.”

Oil for August delivery dropped $4.39 to $91.02 a barrel on the New York Mercantile Exchange, the lowest settlement since Feb. 18. Prices have slipped 0.4 percent this year.

Brent crude for August delivery fell $6.95, or 6.1 percent, to $107.26 a barrel on the London-based ICE Futures Europe exchange, the lowest price since Feb. 22. Prices have risen 13 percent this year.

Brent may “stabilize” around $90 a barrel for the rest of 2011 following the IEA release and increased output from Saudi Arabia, Kuwait and the United Arab Emirates, according to Citigroup Global Markets Inc. analysts Edward Morse and Aakash Doshi.

Goldman Sachs analysts David Greely and Jeffrey Currie forecast the move could reduce their three-month Brent price target by $10 to $12 a barrel to $105 to $107.

Brent Premium

Half of the 60 million barrels of crude from the IEA release will come from the U.S. Strategic Petroleum Reserve, according to the IEA and the U.S. Energy Department. Republicans joined the oil industry in criticizing the move by the Obama administration as political and said the release wasn’t needed, though more drilling is.

Brent, the European benchmark contract, traded at a premium of $16.24 a barrel to U.S. West Texas Intermediate futures today. The difference between the front-month contracts reached a record $22.79 a barrel last week amid a surplus of oil at Cushing, Oklahoma, the U.S. midcontinent hub.

“Brent is going to take a bigger hit than WTI because the SPR barrels are on the Gulf Coast, not the midcontinent,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts.

It’s only the third time in the history of the IEA the global reserves have been tapped. The first was during the 1991 Persian Gulf War, and the second was after Hurricane Katrina in 2005. The Paris-based IEA is an energy policy adviser to 28 industrialized nations including the U.S., Japan and Germany.

‘Different Game Plan’

“Markets get very nervous when a non-commercial player comes into the market, and you’re seeing that today,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s biggest manager of bond funds, said on Bloomberg Television’s “In the Loop” with Betty Liu. “It’s a little bit like introducing a new player on the playing field who has a different game plan completely.”

IEA Executive Director Nobuo Tanaka said at a press conference in Paris that the agency was in touch with producing nations before making its decision to tap reserves. Tanaka said he expects Saudi Arabia to increase production.

The kingdom indicated two weeks ago that it would boost output amid concern that rising prices would derail the global economic recovery. The Saudi decision came after a June 8 meeting of the Organization of Petroleum Exporting Countries at which it failed to push through a production increase.

“It would appear that officials in the main oil exporting and importing countries are combining their efforts to replace the 132 million barrels of light, sweet, Libyan crude lost since late winter,” Morse and Doshi said in their report.

Jobless Claims

Prices also fell after the U.S. Labor Department said applications for jobless benefits increased 9,000 in the week ended June 18 to 429,000. The level of claims exceeded the highest estimate in a Bloomberg News survey. The median projection called for 415,000 filings.

Fed officials yesterday cut their forecasts for growth and employment this year and next in the world’s largest oil- consuming country.

The Thomson Reuters/Jefferies CRB Index of 19 commodities declined 2.3 percent to 330.21, the lowest level since January. Sixteen of the commodities retreated.

The Standard & Poor’s 500 Index dropped 0.3 percent to 1,283.5, and the Dow Jones Industrial Average fell 59.67 points, or 0.5 percent, to 12,050.

Weaker Euro

The euro decreased against the dollar as European Central Bank President Jean-Claude Trichet said the debt crisis threatens to infect banks. A weaker euro and stronger dollar curb the appeal of commodities as an alternative investment.

The currency slipped 0.8 percent to $1.4236. Earlier, it touched $1.4127, the lowest level since June 16.

“There’s a lot of scary news in Europe and it’s looking like the U.S. economy will be growing at an anemic rate through the summer,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “This is not good for the demand outlook.”

Gasoline for July delivery plunged 13.57 cents, or 4.6 percent, to settle at a three-month low of $2.8376 a gallon on the Nymex. Gasoline prices at the pump slipped 1.4 cents yesterday to $3.612 a gallon, the lowest level since March 30. They have fallen 9.4 percent since peaking at a 33-month high of $3.985 on May 4.

Oil volume in electronic trading on the Nymex was 918,190 contracts as of 3:21 p.m. in New York, 69 percent above the 543,548 contracts in total electronic and floor trading yesterday. Open interest was 1.52 million contracts.

--With assistance from Mark Shenk and Betty Liu in New York, Grant Smith in London and Tara Patel in Paris. Editors: Joe Link, Bill Banker

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

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


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