Bloomberg News

Oil Falls as Fed Says There Are ‘Significant’ Risks to Economy

September 21, 2011

Sept. 21 (Bloomberg) -- Crude oil dropped after the Federal Reserve announced plans to buy $400 billion of long-term debt and said there are “significant downside risks” to the economic outlook.

Futures fell 1.2 percent as the Fed plans to replace some bonds in its portfolio with longer-term Treasuries to cut borrowing costs and keep the economy from relapsing into a recession. Prices began to move lower after Moody’s Investors Service downgraded the debt rating of Bank of America Corp. and Wells Fargo & Co.

“The Fed’s downbeat assessment of the economy leaves little room for better demand,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The Fed announcement was already priced in and came on top of bad news about the banks.”

Crude oil for November delivery fell $1 to settle at $85.92 a barrel on the New York Mercantile Exchange. The contract climbed as high as $87.99 and dropped to $85.08 today. Futures have increased 19 percent over the past year.

Brent oil for November settlement dropped 18 cents to end the session at $110.36 a barrel on the London-based ICE Futures Europe Exchange. The European benchmark contract was at premium of $24.44 to U.S. futures, compared with a record $26.87 on Sept. 6, based on November settlement prices.

The U.S. government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute,” Moody’s analysts wrote in the report downgrading the Bank of America today.

Monetary Tools

Federal Reserve Chairman Ben S. Bernanke expanded use of unconventional monetary tools for a second straight meeting after job gains stalled and the government lowered its estimate of second-quarter growth.

Commodities and equities extended losses on the Fed announcement, which confirmed market speculation that the central bank was planning an “Operation Twist” similar to a program in the 1960s.

Fed policy makers pledged at their Aug. 9 meeting to keep the benchmark interest rate near zero at least through mid-2013, substituting it for the less-specific “extended period” commitment that had been in their statements since March 2009.

The Standard & Poor’s 500 Index declined 2.9 percent to 1,166.76 and the Dow Jones Industrial Average fell 2.5 percent to 11,124.84.

“Oil is trading as a cyclical asset,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “Concerns about the economy aren’t good for the oil demand outlook. Oil is tracking the stock market now.”

Supply Decline

Futures climbed earlier when an Energy Department report showed crude oil supplies fell 7.34 million barrels to 339 million last week, the lowest level since January. It was the biggest drop since December. Stockpiles were projected to decline 1.3 million barrels, according to the median of 15 analyst responses in a Bloomberg News survey.

“That big drop in crude oil just surprised everybody,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington.

U.S. crude oil production surged 13 percent to 5.75 million barrels a day last week, the highest level since 2003, the report showed.

Imports of crude oil dropped 2.2 percent to 8.35 million barrels a day last week, the lowest level since April, the report showed. Fuel imports rose 9 percent to 2.1 million barrels a day.

“Imports fell last week and refinery operating rates picked up, so there is an explanation for much of the drop,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “There’s no evidence that there is a global shortage of supply.”

Fuel Inventories

Supplies of distillate fuel, a category that includes heating oil and diesel, declined 874,000 barrels to 157.6 million in the week ended Sept. 16, the Energy Department report shows. They were forecast to increase 1 million barrels, according to the analysts surveyed by Bloomberg News.

Gasoline inventories surged 3.3 million barrels to 214.1 million barrels last week, the biggest one-week gain since May and the highest level since July, the report showed. Analysts estimated that supplies would increase 1.35 million barrels.

“There’s an overwhelming sense of doom about the economy,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “What the Fed does is going to be a lot more important for the market than any change in the weekly inventory data.”

Oil volume in electronic trading on the Nymex was 475,764 contracts as of 3:52 p.m. in New York. Volume totaled 484,182 contracts yesterday, the lowest level since Aug. 29. Open interest was 1.37 million contracts, the least since Dec. 20.

--With assistance from Margot Habiby in Dallas. Editors: Dan Stets, Charlotte Porter

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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