Bloomberg News

Crude Declines on Demand Outlook; IEA May Release More Supplies

June 27, 2011

June 27 (Bloomberg) -- Oil fell in New York on concern economic expansion in the U.S. and China is slowing and as the International Energy Agency said it’s prepared to release additional crude from stockpiles.

Futures dropped as much as 1.5 percent. A U.S. government report showed consumer spending stagnated last month and a preliminary purchasing managers’ index showed China’s factory output may rise at the slowest pace in 11 months in June. In Europe, Greek lawmakers will vote on a five-year austerity plan. Failure to pass the plan may lead to the euro area’s first sovereign default.

“People are now looking critically at the three biggest consuming regions,” said Axel Herlinghaus, a Frankfurt-based senior commodities analyst at DZ Bank AG, which trades crude contracts in New York and London.

Crude for August delivery fell as much as $1.34 to $89.82 a barrel on the New York Mercantile Exchange, and was at $90.42 at 1:41 p.m. London time. Brent oil for August delivery was down $1.02 at $104.10 a barrel on the ICE Futures Europe exchange in London after dropping as much as $2.84 to $102.28.

New York futures dropped the most in six weeks on June 23, dipping below $90 a barrel for the first time since February, after the IEA said its member states including the U.S. and Germany would release oil stockpiles for the third time in the agency’s history. The U.S. will provide 30 million barrels of the IEA release, European members will contribute about 20 million and Asian nations about 10 million barrels.

Risk Aversion

The IEA will act again if needed, Nobuo Tanaka, the agency’s executive director, said on June 25.

“If necessary we’ll continue,” he said in Beijing.

Brent, the European benchmark contract, traded at a premium of $13.60 a barrel to U.S. West Texas Intermediate futures.

Hedge funds cut bullish bets on oil to the lowest level in more than six months. The funds and other large speculators reduced wagers on rising prices by 14 percent in the week ended June 21, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. Bullish bets have dropped 46 percent from a March 8 record amid disappointing U.S. economic reports on employment and housing.

“We are seeing risk aversion in stocks and commodities, combined with a stronger dollar,” Eugen Weinberg, head of commodities research at Commerzbank AG, said from Frankfurt. “The outlook for the U.S. and China is worsening.”

Brent Bets

Some investors view the dollar as a safe haven. Commodities often fall when the dollar rises.

Bets among managed-money investors on gains in the price of Brent crude also fell last week, the ICE Futures Europe exchange said today. Net-long positions dropped to 89,058 contracts from 111,357 in the previous week, ICE said on its website today. Bets on rising prices still outnumbered those on declines by 39,391 contracts, the data showed.

The Federal Reserve is unlikely to start a third round of quantitative easing, known as QE3, when a $600 billion purchase program ends this week, Jan Loeys, chief market strategist at JPMorgan Chase & Co., told Susan Li on Bloomberg Television’s “First Up.” The world’s biggest crude user may release oil stockpiles to drive prices lower and stimulate consumption instead, he said.

“Instead of QE3, we have IEA1, which is the release of strategic oil reserves,” Loeys said. The IEA’s decision “is really pushing oil prices down and will provide a good boost to consumption in the second half of this year,” he said.

Consumer spending in the U.S. unexpectedly stagnated in May as employment prospects dimmed and rising inflation caused Americans to cut back.

Purchases were little changed, the weakest outcome since June 2010, after a revised 0.3 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington. The median of economists surveyed by Bloomberg News called for a 0.1 percent gain. Prices excluding food and energy rose more than forecast.

--With assistance from Christian Schmollinger and Ann Koh in Singapore. Editors: John Buckley, Alessandro Vitelli

To contact the reporters on this story: Rachel Graham in London rgraham13@bloomberg.net; Robert Tuttle in Doha at rtuttle@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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