Bloomberg News

Oil Drops a Second Day on Europe Outlook; Brent Premium Widens

October 20, 2011

Oct. 20 (Bloomberg) -- Oil dropped a second day as fissures between Germany and France threatened to derail European rescue measures, undermining the outlook for fuel consumption.

December futures fell as much as 1.1 percent, extending yesterday’s 2.5 percent slump. U.S. fuel use declined 2.2 percent to the lowest since May last week while crude stockpiles shrank, the Energy Department said. A French-German split emerged over Europe’s rescue strategy as finance ministers prepared to meet. The Federal Reserve said yesterday that U.S. companies reported more doubt about the strength of the nation’s recovery.

“Global confidence in the political will and ability of policymakers has been severely undermined,” Amrita Sen, analyst at Barclays Plc in London, said in a report. Still, “even in the worst case scenario, the downside the oil prices is unlikely to be anything as severe as during the 2008 to 2009 cycle.”

Crude oil for December delivery on the New York Mercantile Exchange, the most actively traded contract, slipped as much 98 cents to $85.27 a barrel and was at $85.94 as of 8:51 a.m. London time. The contract yesterday fell $2.24 to $86.29, the lowest since Oct. 13. November futures, which expire today, were at $85.79.

Brent oil for December settlement was at $108.34 a barrel, down 5 cents, on the London-based ICE Futures Europe exchange. That pushed the spread between the December Brent and Nymex crude contracts to $22.53, compared with $22.10 yesterday and a record high of $27.88 on Oct. 14.

Fuel Demand

U.S. fuel use fell 2.2 percent to 18.3 million barrels a day last week, the least since May, the Energy Department said yesterday in its weekly report. Crude stockpiles dropped 4.73 million barrels to 332.9 million. They were forecast to rise 2 million, according to the median of 13 analyst estimates in a Bloomberg News survey.

Gasoline inventories declined 3.32 million to 206.3 million. They were forecast to slide 1.5 million, according to the survey. Supplies of distillate fuel, a category that includes oil and diesel, decreased 4.27 million barrels compared with an estimate for a 1.5 million decline.

Oil prices have dropped 6.2 percent in New York this year amid concern that the faltering U.S. economy and Europe’s debt crisis will curb raw material demand. Luxembourg Prime Minister Jean-Claude Juncker, who chairs a group of euro-area finance ministers, indicated an impromptu meeting of European leaders in Frankfurt last night failed to resolve differences over the region’s rescue plan.

“The market rejected the sizable draw in inventories and decided to focus on what’s happening with Germany and France,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney. “The disagreement put the cat among the pigeons. Economic growth will be hurt even further because there’s no resolution out of Europe.”

--With assistance from Christian Schmollinger in Singapore. Editors: John Buckley, Raj Rajendran

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net


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