Bloomberg News

Oil Falls as China Raises Rates, Moody’s Cuts Portuguese Rating

July 06, 2011

July 6 (Bloomberg) -- Crude oil fell after China’s central bank raised interest rates and Moody’s Investors Service downgraded Portugal’s credit rating, heightening concern economic growth will slow and crimp fuel demand.

Crude dipped 0.3 percent in New York as the People’s Bank of China said benchmark deposit and lending rates will increase 25 basis points tomorrow. The euro weakened against the dollar after Moody’s cut Portugal’s rating to junk status, curbing the appeal of dollar-denominated commodities to investors.

“We came in today after the Chinese raised their interest rates, because people are thinking this is going to slow the growth over there and hinder demand,” said Chris Dillman, an analyst at Tradition Energy in Stamford, Connecticut. “Moody’s downgrade put pressure on the euro and boosted the dollar.”

Crude oil for August delivery fell 24 cents to settle at $96.65 a barrel on the New York Mercantile Exchange. Prices have increased 34 percent in the past year.

Prices climbed from the settlement after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles decreased 3.17 million barrels to 357.1 million, the lowest level since the week ended April 15. August oil rose 1 cent to $96.90 a barrel in electronic trading at 4:32 p.m.

Brent crude oil for August delivery rose 1 cent to settle at $113.62 a barrel on the London-based ICE Futures Europe exchange. The European benchmark was at a premium of $16.97 to U.S. futures. The spread reached a record $22.29 on June 15.

Chinese Rates

China raised benchmark interest rates for the third time this year after inflation accelerated to the quickest pace since 2008. The one-year lending rate will increase to 6.56 percent from 6.31 percent tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate rises to 3.5 percent from 3.25 percent.

“China’s rate increase will be bearish in the long term,” said Kyle Cooper, director of research for IAF Advisors in Houston. “It should eventually slow economic growth and curb fuel demand. All of the recent growth has come from emerging economies such as China.”

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 a sale of 1 billion euros of treasury bills.

Greece received the lowest sovereign credit rating in the world from S&P on June 13, when the company lowered it to CCC, eight levels below investment grade. S&P rates Portugal at BBB-, the lowest investment grade.

Weakening Euro

“The market is keeping an eye on the situation in Europe,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “The falling euro is putting downward pressure on the price of oil.”

The euro weakened against 14 of 16 major currencies tracked by Bloomberg. The common currency slipped by 0.8 percent to $1.4314 at 4:34 p.m. It touched $1.4286, the lowest level since June 27.

Prices also came under pressure as the Institute for Supply Management’s U.S. index of non-manufacturing businesses decreased to 53.3 in June from 54.6 a month earlier. A reading above 50 signals expansion.

The measure was projected to drop to 53.7, according to the median of 71 economist projections in a Bloomberg News survey. The Tempe, Arizona-based group’s index averaged 56.1 in the five years to December 2007, when the last recession began.

The U.S. and China were responsible for 32 percent of global oil demand in 2010, according to BP Plc’s Statistical Review of World Energy on June 8.

Portugal and Greece

“Worries about Portugal and Greece will continue to weigh on prices,” said Peter Beutel, president of trading advisory company Cameron Hanover Inc. in New Canaan, Connecticut. “The market is now waiting for the jobs numbers later this week.”

U.S. payrolls probably expanded by 100,000 in June as the unemployment rate held at 9.1 percent, according to the median forecast in a Bloomberg News survey ahead of a Labor Department report on July 8.

A U.S. Energy Department report tomorrow will probably show that crude oil stockpiles fell for a fifth week, the longest decline since January. U.S. inventories declined 2.5 million barrels, or 0.7 percent, to 357 million in the week ended July 1, according to the median estimate of 15 analysts surveyed by Bloomberg News. All respondents expect a drop.

The department and API reports are a day late this week because of the Fourth of July holiday.

Oil volume in electronic trading on the Nymex was 505,567 contracts as of 4:34 p.m. in New York. Volume totaled 520,283 contracts yesterday, 24 percent below the average of the past three months. Open interest was 1.52 million contracts.

--With assistance from Grant Smith in London. Editors: Richard Stubbe, Bill Banker

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