Bloomberg News

Oil Declines a Third Day as Greek Referendum Raises Default Risk

November 01, 2011

Nov. 1 (Bloomberg) -- Oil fell for a third day amid concern that Europe’s plan to bail out Greece will unravel if the country conducts a referendum.

Futures dropped 1.1 percent after Prime Minister George Papandreou’s pledge to call a vote on its five-day-old bailout sent equities and the euro lower. Crude climbed 6.8 percent last week, the biggest gain since February, on the European package. Oil also slipped as China’s Purchasing Managers’ Index fell for the first time in three months in October.

“The market got overenthusiastic over the agreement last week,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. “The party’s over and now we have to deal with the hangover.”

Crude oil for December delivery declined $1 to settle at $92.19 a barrel on the New York Mercantile Exchange. Futures climbed 18 percent in October, the biggest gain since May 2009.

Prices dropped from the settlement as the industry-funded American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles fell 156,000 barrels to 339.9 million last week. December oil was down $1.55, or 1.7 percent, to $91.64 a barrel in electronic trading at 4:34 p.m.

Brent oil for December settlement dropped 2 cents to end the session at $109.54 a barrel on the London-based ICE Futures Europe exchange. The difference between Nymex crude and Brent widened to $17.35 today. The European benchmark traded at a $16.37 premium yesterday, the least since June 28.

Papandreou’s referendum risks pushing Greece into default if voters reject the plan. An opinion poll published Oct. 29 showed most Greeks believe the accord on a new bailout package and a debt writedown is negative.

Fitch Warning

A rejection of the aid plan “would increase the risk of a forced and disorderly sovereign default” and raises the chance of Greece leaving the euro, Fitch Ratings said in a statement today.

The euro dropped 1.1 percent to $1.3704 at 4:35 p.m. A weaker euro and stronger dollar reduce the appeal of raw materials as an investment.

“The Greek action and the market reaction underscore the instability of the euro,” Schork said.

Greece’s announcement came “out of the blue, it’s surprising, very risky,” Norbert Barthle, the ranking member of German Chancellor Angela Merkel’s Christian Democratic Union party on parliament’s budget committee, said in a telephone interview.

‘The Greek Debacle’

“The Greek debacle continues to be the main focus,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York. “You are seeing risk reduction across the board because of concerns about what will happen in Europe.”

The Standard & Poor’s 500 Index fell 2.8 percent to 1,218.28, and the Dow Jones Industrial Average dropped 2.5 percent to 11,657.96.

Oil volume in electronic trading on the Nymex rebounded to 602,752 contracts as of 4:35 p.m. in New York after totaling 381,435 yesterday, the lowest level since April 29. CME Group Inc., owner of the exchange, limited trading by MF Global Holdings Ltd., which filed for bankruptcy protection yesterday.

U.S. regulators are investigating whether hundreds of millions of dollars are missing from client accounts at MF Global, according to two people with knowledge of the matter. The firm was ordered by the enforcement division of the Commodity Futures Trading Commission to preserve records for the review, one of the people said. A lawyer for MF Global said the company has accounted for all of its assets.

Memories of 2008

“People are scared right now and acting accordingly,” Schork said. “The bankruptcy of MF Global and troubles in Europe bring to mind 2008.”

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 prices dropped from $147.27 a barrel in July of that year, the all-time high, to $32.40 in December.

China’s Purchasing Managers’ Index fell to 50.4 from 51.2 in September, the China Federation of Logistics and Purchasing said today. That compared with the median estimate of 51.8 in a Bloomberg News survey of 16 economists. The nation is the world’s second-biggest oil user, after the U.S.

“Greece’s surprise referendum move is shaking some confidence again and China’s factory activity is painting a gloomy picture for demand,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “The market was kind of building some optimism into the prices over the last few weeks and some of that confidence is starting to wane.”

OPEC Output

Oil output in the Organization of Petroleum Exporting Countries rose in October to the highest level in almost three years as gains in Libya and Angola outpaced a Saudi cut, a Bloomberg News survey showed yesterday. Production increased 0.4 percent to average 30.1 million barrels a day, the most since November 2008.

Iraq’s daily oil production capacity will increase by 100,000 barrels to a total of 3 million barrels in the “next few days,” Oil Minister Abdul Kareem Al-Luabi said. The nation produced oil at an average rate of 2.9 million barrels a day in October, he said in an interview in Baghdad today. The country is the only OPEC member without a production quota.

An Energy Department report tomorrow will probably show that U.S. crude oil supplies rose 1 million barrels to 338.6 million last week, according to the median of 13 analyst responses in a Bloomberg News survey.

--With assistance from Brian Parkin in Berlin and Moming Zhou in New York. Editors: Richard Stubbe, David Marino

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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