Bloomberg News

Crude Oil Falls as European Union Considers $1.3 Trillion Fund

October 20, 2011

Oct. 20 (Bloomberg) -- Crude oil dropped in New York as European leaders considered unleashing 940 billion euros ($1.3 trillion) to tame the debt crisis, and France and Germany asked officials to agree on plans next week.

Futures fell 0.9 percent as two people familiar with the matter said Europe may combine temporary and permanent rescue funds to deploy as much as 940 billion euros. Oil pared losses after German Chancellor Angela Merkel and French President Nicolas Sarkozy said in a joint statement they want governments to agree on a “comprehensive and ambitious” plan by Oct. 26.

“The oil market is being driven by sentiment over the European debt crisis,” said David Greely, head of energy research at Goldman Sachs Group Inc. in New York. “The failure to have a resolution and the uncertainty that’s brought is having a major impact on the market.”

Crude oil for November delivery declined 81 cents to settle at $85.30 a barrel on the New York Mercantile Exchange. November futures expired today. December oil, the most-actively traded contract, dropped 22 cents to $86.07.

Brent oil for December settlement rose $1.37, or 1.3 percent, to end the session at $109.76 a barrel on the London- based ICE Futures Europe exchange. The spread between the December Brent and Nymex crude contracts widened to $23.69 from $22.10 yesterday.

Negotiations over pairing the temporary and permanent funds as of mid-2012 accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the two people, who decline to be identified because a decision rests with political leaders.

Summit Meetings

The dual-use option may break a deadlock that today led the European Union to announce that an Oct. 23 summit will have to be followed by another three days later. The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece which will run for up to 30 years.

“The market continues to move back and forth on the latest headlines on the European debt situation,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

The EFSF may be able to offer loans to countries “before they face difficulties raising funds” in bond markets, the draft guidelines obtained by Bloomberg News show. The fund may be able to grant credit lines amounting to 10 percent of a country’s economy. Some legislators from Merkel’s coalition said the changes may shift intolerable burdens to German taxpayers.

Moving Wildly

“We don’t know how the European debt crisis will work out, so the market will move wildly on any small bit of news,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.3 billion. “The situation in Europe is every bit as serious as the conditions just before the failure of Bear Stearns and Lehman Brothers.”

The bankruptcy of Lehman Brothers Holdings Inc. in September 2008 and the near-collapse of Bear Stearns Cos. earlier that year helped usher in the global recession.

Oil advanced earlier after an unexpected expansion of manufacturing in the Philadelphia region. The Federal Reserve Bank of Philadelphia’s general economic index increased to 8.7 from minus 17.5 last month, the biggest gain in 31 years. Economists forecast minus 9.4 for the gauge, according to the median estimate in a Bloomberg News survey.

Qaddafi’s Death

Libya’s Muammar Qaddafi, whose dictatorship lasted 42 years, died after being captured by forces led by the Misrata Military Council, the group said. Details will be announced later today in a news conference in Misrata, the council said in an e-mailed statement. Its troops led the assault on Qaddafi’s hometown of Sirte and act independently from the interim government, known as the National Transitional Council.

The NTC is struggling to unite the factions that challenged the Qaddafi regime after protests in February were put down. The Misrata Military Council issued its comments as NTC officials gave their own statement in the eastern city of Benghazi, their base during the conflict.

“Qaddafi’s death seems like the natural conclusion to the events in Libya,” said Kyle Cooper, director of research for IAF Advisors in Houston.

Libyan output rose 55,000 barrels to 100,000 last month, a Bloomberg News survey showed. Production in the North African nation has tumbled from 1.585 million barrels a day in January, the last month before an uprising against Qaddafi’s government.

“The death of Qaddafi probably won’t have much impact on the market,” Greely said. “The market had already moved on and is counting on the resumption of Libyan production.”

Libyan Production Outlook

Libyan production is set to reach 400,000 barrels a day in the fourth quarter of 2011, with output closer to 600,000 at the end of the year, the International Energy Agency said on Oct. 12.

Oil volume in electronic trading on the Nymex was 577,806 contracts as of 3:30 p.m. in New York. Volume totaled 665,796 contracts yesterday, 3.9 percent lower than the average over the last three months. Open interest was 1.41 million contracts.

--With assistance from James G. Neuger in Brussels. 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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