Bloomberg News

Oil Falls as China Boosts Interest Rates, Portugal Rating Cut

July 06, 2011

July 6 (Bloomberg) -- Oil declined as China’s central bank raised interest rates, and after Moody’s Investors Service downgraded Portugal’s credit rating, heightening concern that slower economic growth will crimp fuel consumption.

Brent crude fell as much 1.5 percent, extending earlier losses as the People’s Bank of China said benchmark deposit and lending rates will rise 25 basis points from tomorrow. The euro weakened against the dollar after Moody’s cut Portugal’s rating to junk status, curbing the appeal of dollar-denominated assets such as crude. The industry-funded American Petroleum Institute will report weekly supply and demand data today.

“Tightening monetary policy in China is already impacting growth,” said Christophe Barret, a London-based oil analyst at Credit Agricole SA. “This is a declaration of policy, that inflation is more important than growth. It will have an impact on oil demand.”

Brent crude for August settlement on London’s ICE Futures Europe exchange dropped as much as $1.70 to $111.91 a barrel and traded at $112.19 at 1:03 p.m. local time. The European benchmark was at a premium of $15.99 to U.S. futures. The spread reached a record $22.29 on June 15.

Crude for August delivery on the New York Mercantile Exchange was down 69 cents at $96.20 a barrel. Yesterday, it advanced to $96.89, the highest settlement since June 14.

Portuguese Downgrade

Moody’s slashed Portugal four levels late yesterday to Ba2 from Baa1 with a negative outlook. The decision came two months after Portugal got a 78 billion-euro ($112 billion) aid package and hours before today’s sale of 1 billion euros of treasury bills. The euro weakened against all but two of 16 major peers tracked by Bloomberg.

“Right now the market’s reacting to rising concerns about Portugal’s credit rating, risk aversion and the strengthening dollar,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt.

A U.S. Energy Department report tomorrow that may show crude stockpiles dropped, the longest decline since January. U.S. crude inventories shrank 2.5 million barrels from 359.5 million in the week ended July 1, according to the median estimate of 11 analysts surveyed by Bloomberg News. All respondents expect a drop.

“Inventories drawing, the summer drive-time and the hurricane season all provide that flavor for a market that wants to continue higher,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who predicts oil in New York will average $100 a barrel this year. “I’d expect more gains to be had in the oil market.”

Gasoline stockpiles probably increased 1 million barrels from 213.2 million, based on the survey. Supplies are down for two weeks as imports declined.

Factory Orders

Oil rose yesterday after a Commerce Department report showed orders placed with U.S. factories increased 0.8 percent in May, below a median economist forecast of 1 percent. The Institute for Supply Management’s index of service industries, due for release tomorrow, may decrease.

“There was a good deal of ‘fact-fitting’ with traders talking about vague optimism for the second half,” Peter Beutel, president of Cameron Hanover Inc., an energy adviser in New Canaan, Connecticut, said in a note. “Nothing really fit well for us and the reasons used to describe the advance of the last few days have hung like designer dresses on homeless models. They just don’t look right.”

Oil’s rally in New York may stall around $98 a barrel as prices approach technical resistance, according to data compiled by Bloomberg. Front-month futures are below the 61.8 percent one-year Fibonacci retracement on the daily chart. A failure to breach resistance usually means prices will change direction.

--With assistance from Yee Kai Pin and Christian Schmollinger in Singapore and Ben Sharples in Melbourne. Editors: John Buckley, Raj Rajendran

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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


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