Bloomberg News

Oil Pares Biggest Weekly Gain Since February on Japanese Economy

October 28, 2011

Oct. 28 (Bloomberg) -- Crude oil futures fell in New York, paring the biggest weekly gain since February, as a drop in Japan’s industrial output prompted traders to lock in profits from yesterday’s rally.

Crude dropped 0.7 percent as Japanese factory production declined 4 percent in September, almost twice as much as the median estimate of economists surveyed by Bloomberg News. Oil advanced 4.2 percent yesterday after data showed the U.S. economy grew at the fastest pace in a year and European leaders agreed on a plan to curb the region’s debt crisis.

“Japan is part of the story that’s driving down oil prices,” said Richard Ilczyszyn, a Chicago-based senior market strategist at MF Global. “Commodities are pulling back from yesterday’s gain. People are closing books for the month.”

Crude for December delivery declined 64 cents to settle at $93.32 a barrel on the New York Mercantile Exchange. It rose to $93.96 yesterday, the highest settlement since Aug. 1. Prices gained 6.8 percent since Oct. 21 in the biggest weekly advance since Feb. 25. They have climbed 18 percent this month.

“Japan is a big oil consumer and the market is concerned about their industrial production,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas. “People are having second thoughts about yesterday’s rally and about Europe’s ability to pull this thing off.”

Brent oil for December settlement slid $2.17, or 1.9 percent, to $109.91 a barrel on the London-based ICE Futures Europe exchange. Brent gained 0.3 percent this week.

The spread between Brent and Nymex futures narrowed to $16.59, the smallest differential between the two front-month contracts in four months.

Brent Potential

“The price of Brent has barely gained since the start of the week,” Carsten Fritsch, a Frankfurt-based Commerzbank analyst, said in a report today. “This could be an indication that the upward potential for Brent is virtually exhausted and a price slump can be expected once the excessive euphoria on financial markets at present starts to fade.”

Japan’s industrial production declined last month after increasing as companies made up for orders disrupted by the country’s strongest earthquake on record March 11. The drop reported by the trade ministry in Tokyo was bigger than all 28 forecasts of economists surveyed by Bloomberg News.

Japan is the world’s third-largest oil consuming country after the U.S. and China, using 4.45 million barrels a day in 2010, according to the BP Statistical Review.

‘Cold Water’

“The Japanese data is pouring some cold water of economic reality over the euphoria that erupted in the market yesterday,” said James Zhang, a strategist at Standard Bank Plc in London, who forecasts Brent will average $98 a barrel this quarter. “There’s also some profit-taking after the relief rally yesterday.”

Oil also followed declines in other commodities. The S&P’s GSCI Index of 24 raw materials dropped 0.7 percent to 652.55.

“People are pretty comfortable at the $92 level and we are seeing a lot of profit-taking going on here,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York.

Oil pared intraday losses after data showed U.S. consumer confidence unexpectedly rose in October from the previous month.

The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 60.9 from 59.4 in September. The gauge was projected to drop to 58, according to the median forecast of 66 economists surveyed by Bloomberg News.

U.S. Economy

The U.S. economy, the world’s largest, expanded at a 2.5 percent annual rate, up from 1.3 percent in the prior three months, Commerce Department data showed yesterday.

European leaders pressured bondholders into accepting 50 percent writedowns on Greek debt and agreed to boost a rescue fund to 1 trillion euros ($1.4 trillion) in a package intended to tame a crisis that threatens to slow the global economy and curb demand for commodities.

“It remains a big question about what’s going to happen in Europe,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “They just seemed to borrow some time with this agreement.”

Oil may fall next week on concern that European leaders’ plans to fight the debt-crisis may provide limited relief, a Bloomberg News survey showed.

Fourteen of 29 analysts, or 48 percent, forecast oil will decline through Nov. 4. Six, or 21 percent, predicted a gain, and nine said there will be little change. Last week, 50 percent of the surveyed analysts projected a drop.

Oil volume in electronic trading on the Nymex was 484,159 contracts as of 3:50 p.m. in New York. Volume totaled 657,644 contracts yesterday, 5.5 percent below the three-month average. Open interest was 1.36 million contracts.

--With assistance from Grant Smith in London, Justin Doom in New York, and Aki Ito in Tokyo. Editors: Margot Habiby, Dan Stets

To contact the reporters on this story: Moming Zhou in New York at;

To contact the editor responsible for this story: Dan Stets at

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