Bloomberg News

Oil Drops After Bernanke Says Fed Isn’t Planning More Stimulus

July 14, 2011

July 14 (Bloomberg) -- Oil in New York fell, reaching a record discount to Brent crude, after Federal Reserve Chairman Ben S. Bernanke said the Fed isn’t planning more bond-buying to stimulate economic growth.

Futures dropped 2.4 percent after Bernanke told Congress that the central bank would be cautious about initiating a third round of quantitative easing because of higher inflation this year. Oil climbed as much as 0.8 percent earlier when the Labor Department said applications for unemployment benefits decreased 22,000 to 405,000 last week.

“The Bernanke comments took away some of the speculation that the Fed was about to commence with a third round of quantitative easing,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The comment had an immediate impact on both oil and the dollar.”

Crude oil for August delivery declined $2.36 to settle at $95.69 a barrel on the New York Mercantile Exchange. The contract dropped as much as $3.52. Oil has risen 23 percent in the past year.

Crude’s discount to Brent widened to $22.63 a barrel, exceeding the previous record of $22.29 set June 15. Brent for August settlement fell 46 cents, or 0.4 percent, to expire at $118.32 a barrel on the London-based ICE Futures Europe exchange. The more actively traded September futures declined $1.59, or 1.3 percent, to settle at $116.26.

“We’re not prepared at this point to take further action,” Bernanke said today, in response to a question from Senate Banking Committee Chairman Tim Johnson, a Democrat from South Dakota.

Mixed Signals

Bernanke signaled yesterday that the Fed has more tools for monetary easing. He said the central bank could keep interest rates at a record low and hold its balance sheet at $2.87 trillion for a longer period. It may also buy more bonds, increase the average maturity of its securities holdings or cut the interest rate it pays banks on their reserves, he said.

“People are reassessing what is going to happen with quantitative easing,” said Peter Beutel, president of Cameron Hanover Inc., a trading advisory company in New Canaan, Connecticut. “It seems Bernanke has put conditions on any additional easing, which make it unlikely in the short term.”

The Standard & Poor’s 500 Index dropped 0.5 percent to 1,308.87 and the Dow Jones Industrial Average fell 0.4 percent to 12,437.12 at 4:04 p.m. in New York.

Moody’s Review

Moody’s put the U.S. on review for the first time since 1996 as concern grew that political gridlock will lead to default. The American government has held an Aaa rating with Moody’s since 1917.

President Barack Obama may summon congressional leaders to a Camp David summit this weekend after the latest round of White House negotiations on the deficit deal ended on a tense note. Obama “got very agitated” and left the room after House Majority Leader Eric Cantor suggested a vote on a smaller deal, Cantor said in an interview.

“The market is hanging onto every word Bernanke says,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “The budget impasse is looking more and more like a train wreck. It looks like this will go right down to the wire.”

Economists forecast the Labor Department would report 415,000 claims for jobless claims today, according to the median estimate in a Bloomberg News survey. U.S. wholesale costs dropped more than forecast in June, the department said in a separate report.

Weaker Demand

“There was strength earlier on the jobs number but the Bernanke comments changed that,” Beutel said. “We may be seeing a delayed reaction to yesterday’s demand number.”

Total U.S. fuel demand dropped 0.4 percent to an average 18.9 million barrels a day over the past four weeks, 1.4 percent lower than the same period last year, an Energy Department report showed yesterday. Gasoline consumption slipped 1 percent to an average 9.23 million barrels a day over the past four weeks, 0.9 percent lower than a year earlier.

Gasoline for August delivery declined 2.68 cents, or 0.9 percent, to settle at $3.1248 a gallon in New York.

The Organization of Petroleum Exporting Countries will increase crude loadings this month, according to tanker-tracker Oil Movements. The group will ship 22.99 million barrels a day in the four weeks to July 30, up 0.7 percent from last month, the Halifax, England-based consultant said today. They calculate shipments by keeping a tally of tanker-rental agreements.

Oil volume in electronic trading on the Nymex was 742,866 contracts as of 3:42 p.m. in New York. Volume totaled 718,474 contracts yesterday, 5.8 percent above the average of the past three months. Open interest was 1.55 million contracts, the most since June 15.

--Editors: Richard Stubbe, Dan Stets

To contact the reporter on this story: 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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