Bloomberg News

Oil Snaps Longest 2011 Rally on IEA Demand Outlook, Euro’s Gain

October 12, 2011

Oct. 12 (Bloomberg) -- Oil fell for the first day in six after the International Energy Agency reduced its demand forecast and the euro surged on European Union plans to help banks. Brent oil’s premium to New York futures increased.

Futures snapped the longest winning streak this year as the IEA cut 2012 demand estimates by 210,000 barrels a day and said Libyan output will rebound to 600,000 barrels a day by year’s end. Brent oil and the euro rose in London on speculation that Europe’s debt problems will be resolved and after the U.S. said Iran was linked to a plot to kill the Saudi Arabian ambassador to the U.S.

“Crude is latching onto the stronger euro and the optimism that we’re going to see the European debt crisis contained,” said Matt Smith, a commodities analyst with Summit Energy Services Inc. in Louisville, Kentucky.

Oil for November delivery fell 24 cents, or 0.3 percent, to settle at $85.57 a barrel on the New York Mercantile Exchange, the first decline since Oct. 4. Futures have fallen 6.4 percent this year.

November oil dropped to $84.80 a barrel in electronic trading after the trading floor closed, then rebounded to $85.04 at 4:32 p.m. after the American Petroleum Institute reported that U.S. crude-oil stockpiles decreased 3.81 million barrels to 340.4 million.

The IEA reduced its world demand forecast to 90.5 million barrels a day. That means consumption will increase by 1.3 million barrels a day, or 1.4 percent, from this year.

Brent oil for November settlement rose 63 cents, or 0.6 percent, to settle at $111.36 on the London-based ICE Futures Europe exchange at 2:32 p.m. in New York.

Brent-WTI Spread

Brent expanded its premium to New York futures to $25.79 a barrel, near the Sept. 6 record of $26.87 based on settlement prices. The spread has widened for the past four days, pressuring West Texas Intermediate oil futures traded in New York and supporting Brent.

“People are playing the Brent-WTI spread because they think the European situation is going to be resolved and they’re going to use some oil in Europe,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The other reason is the Iranian situation. If we lose Iranian oil, it’s kind of the same thing as losing Libyan oil, and that drove the spread earlier this year.”

Libyan production dropped 97 percent this year to a low of 45,000 barrels a day in August as rebels deposed longtime leader Muammar Qaddafi, based on Bloomberg News estimates. Output increased to 100,000 barrels a day in September as a transitional government took over.

Iran produced 3.59 million barrels a day last month, second only to Saudi Arabia in the Organization of Petroleum Exporting Countries.

Condemnation of Iran

The U.S. will work closely with international partners to condemn Iran and further isolate it, Secretary of State Hillary Clinton said in a speech in Washington. She said the Islamic republic “must be held accountable” for its “flagrant violation” of U.S. and international laws.

Brent also increased more than WTI after the supervisory committee for the Dow Jones-UBS Commodity Index said yesterday that it will include Brent in the index for the first time from January, with a weighting of one-third of the crude portion of the index. It said it was reducing its WTI allocation.

Earlier, New York futures rose as much as 0.9 percent as the euro surged to a three-week high after European Commission President Jose Barroso called for a “coordinated approach” to recapitalize the region’s banks and Slovakia’s political parties reached an agreement to approve Europe’s enhanced bailout fund.

Slovakia is the only country in the 17-member euro area yet to approve the European Financial Stability Facility. Lawmakers rejected the measure yesterday amid a dispute over the future of Prime Minister Iveta Radicova.

Euro Surges

The euro gained 1.1 percent to $1.3789 at 4:42 p.m. in New York. Earlier, it touched $1.3834, the highest intraday level since Sept. 16.

“There’s relief about the risk in the EU,” said Thorbjorn Bak Jensen, an analyst at Global Risk Management in Middelfart, Denmark.

Oil prices also rebounded from the day’s lows because of a rally in the equity markets. The Standard & Poor’s 500 Index gained 1 percent to 1,207.25, and the Dow Jones Industrial Average increased 0.9 percent to 11,518.85.

“The crude oil market doesn’t really have much to trade on other than following the stock market around like a puppy dog,” said Stephen Schork, president of Schork Group Inc., an energy advisory company in Villanova, Pennsylvania.

U.S. Forecast

The U.S. Energy Department cut its crude-oil price projection for 2011 after futures prices in New York tumbled in September by the most since May 2010. WTI oil will average $92.36 a barrel this year, down 2.2 percent from the September projection of $94.40, the department said today in its monthly Short-Term Energy Outlook. Prices have averaged $94.92 a barrel so far this year.

Oil volume in electronic trading on the Nymex was 580,034 contracts as of 4:34 p.m. in New York. Volume totaled 810,036 contracts yesterday, 21 percent above the average of the past three months. Open interest was 1.42 million contracts.

--With assistance from Grant Smith in London and Mark Shenk in New York. Editor: 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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