Bloomberg News

Oil Drops on Slowing Economy, Prospect of Another IEA Release

June 27, 2011

June 27 (Bloomberg) -- Oil fell to the lowest level in more than four months as data showed U.S. consumer spending stagnated last month and after the International Energy Agency said it’s prepared to release more crude from stockpiles.

Crude dropped 0.6 percent after a U.S. report showed consumer spending was little changed last month, raising concern that a slowing U.S. economy will reduce energy demand. The IEA, which announced June 23 that it would release 60 million barrels from strategic reserves, said it will decide in 30 days whether to tap those stockpiles again.

“The market’s been struggling because of economic concerns both in the U.S. and globally,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc in New York. “When these strategic reserves come to the market, they’re going to compete directly with Brent crude, which is the market that led us up and is leading us back down again.”

Crude for August delivery fell 55 cents to $90.61 a barrel on the New York Mercantile Exchange, the lowest settlement level since Feb. 18. Prices have tumbled 15 percent in the second quarter.

Brent oil for August delivery rose 87 cents to $105.99 on the ICE Futures Europe exchange in London. Brent, the European benchmark contract, traded at a premium of $15.38 to U.S. futures. The difference between the front-month contracts reached a record $23.32 June 15.

Consumer Spending

Consumer spending was little changed in the U.S. in May, 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.

The IEA, which announced June 23 that members would jointly tap strategic reserve for the third time in the organization’s history, 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. Previous releases were in response to the first Persian Gulf War in 1991 and Hurricane Katrina in 2005.

New York futures dropped the most in six weeks on June 23, dipping below $90 a barrel for the first time since February. 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.

‘No Need’

Iran sees no need for last week’s release of emergency oil stockpiles by the IEA because the balance of consumption and production is at a “desirable” level, the country’s acting oil minister, Mohammad Aliabadi, told reporters in Vienna.

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.

“The market dropped below $90 once again on fears about the economy and the Greek issues,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Just below $90 is pretty strong support, so it’s trying to hold last week’s lows.”

Earlier, crude rose as much as 14 cents in New York and Brent advanced as the euro rose to a one-week high against the dollar, boosting commodities’ appeal as an alternative to the U.S. currency.

The euro rose 0.6 percent to $1.4274 in New York. It touched $1.4294.

‘Chasing the Dollar’

“Right now, it seems like everybody’s chasing the dollar,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York. “It’s the week before the holiday, and you’re going to get a lot of volatility.”

The number of rigs drilling for oil in the U.S. gained by 19 to 1,003 last week, the 10th consecutive week the count has reached the highest level since Houston-based Baker Hughes Inc. separated the oil and natural gas rig counts in 1987.

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.

Oil volume in electronic trading on the Nymex was 455,083 contracts as of 3:16 p.m. in New York. Volume totaled 707,352 contracts on June 24, 5.3 percent above the average of the past three months. Open interest was 1.53 million contracts.

--With assistance from Rachel Graham and Grant Smith in London and Robert Tuttle in Doha. Editors: Richard Stubbe, Dan Stets

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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