Bloomberg News

Oil Drops on European Crisis, Brent Premium Advances to Record

September 06, 2011

Sept. 6 (Bloomberg) -- Oil in New York fell to the lowest level in more than a week as speculation that the European debt crisis is spreading pressured the euro and equities. Brent crude’s premium to West Texas Intermediate climbed to a record.

Prices declined 0.5 percent as European stocks dropped to the lowest level since July 2009 on concern the region’s debt crisis will derail the recovery. Crude pared a loss of as much as 3.8 percent after the government reported at 2 p.m. New York time that 61 percent of Gulf of Mexico output remained shut in after Tropical Storm Lee made landfall in Louisiana Sept. 4.

“All markets, including crude, continue to get rattled by this European situation and a sense that there’s certainly no silver bullet on the immediate horizon to help this economy,” said John Kilduff, a partner at Again Capital LLC, a New York- based hedge fund that focuses on energy. “We’re going to see these sell-offs hit us with regularity.”

Oil for October delivery slipped 43 cents to $86.02 a barrel on the New York Mercantile Exchange, the lowest settlement price since Aug. 26. Prices have fallen 5.9 percent this year.

Floor trading was closed yesterday for the U.S. Labor Day holiday and electronic trades will be booked with today’s transactions for settlement purposes. Global equities fell yesterday, Italian bonds dropped for an 11th day and the cost of government and bank default insurance rose to records amid Europe’s debt crisis.

Brent for October settlement rose $2.81, or 2.6 percent, to $112.89 a barrel on the ICE Futures Europe Exchange. Brent dropped 2 percent yesterday. The European benchmark’s $26.87 premium of $26.87 to U.S. futures breaching the previous high of $26.21 set Aug. 19.

Declining Euro

“People are just worried about the economy,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It’s hard to see any reason to be bullish and people are in sell-off mode now.”

The euro weakened against the dollar for a sixth day, curbing commodities’ appeal as an alternative investment. The euro fell 0.7 percent to $1.3993 at 3:47 p.m. in New York from $1.4098 yesterday. It declined 0.8 percent yesterday.

The Standard & Poor’s 500 Index dropped 0.7 percent to 1,165.24, and the Dow Jones Industrial Average fell 0.9 percent to 11,139.30 at 4:03 p.m. in New York.

The Stoxx Europe 600 Index slid 0.7 percent to 221.98 at the 4:30 p.m. close in London after earlier climbing as much as 1 percent. The gauge has tumbled 7.1 percent over the past three days.

Tropical Storm Lee

About 846,670 barrels a day of oil production in the Gulf of Mexico has been curtailed because of Tropical Storm Lee as of 11:30 a.m. Houston time today, the Bureau of Ocean Energy Management, Regulation and Enforcement said on its website. That compares with 858,935 barrels the day before. About 2.2 billion cubic feet in daily gas production has been shut in, compared with 2.44 billion yesterday.

Earlier, oil and equities trimmed losses after a gauge of U.S. service industries showed faster-than-forecast growth.

The Institute for Supply Management’s index of non- manufacturing businesses increased to 53.3 last month from 52.7 in July. Economists forecast the gauge would drop to 51, according to the median estimate in a Bloomberg News survey. A Chinese services index published yesterday fell to a record low in August. The U.S. and China are the world’s top two oil- consuming countries.

Swiss Central Bank

A drop in the dollar following Switzerland’s attempt to cap the value of its currency also made raw materials more attractive to investors before U.S. floor trading began.

Brent futures rose as the dollar plunged after the Swiss National Bank said it’s setting a minimum franc exchange against the euro. The currency later advanced.

“If the dollar falters, that will help oil,” said Christopher Bellew, a senior broker at Jefferies Bache Ltd. in London, who correctly predicted Brent wouldn’t go higher than $120 this summer. “In spite of the dire state of Western economies, I think demand in China and other emerging nations, the potential for hurricane shut-ins and unrest in the Middle East mean prices will go back up.”

Oil volume in electronic trading on the Nymex was 493,721 contracts as of 4:28 p.m. in New York. Volume totaled 574,816 contracts Sept. 2, 16 percent below the average of the past three months. Open interest was 1.52 million contracts.

--With assistance from Grant Smith in London and Christine Buurma in New York. 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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