Bloomberg News

Oil Falls Below $100 on Europe Debt Concern and U.S. Equities

November 17, 2011

Nov. 17 (Bloomberg) -- Oil fell below $100 a barrel as rising bond yields in Spain and France heightened concern that Europe’s crisis is spreading and as U.S. equities declined.

Futures dropped 3.7 percent as Spain’s borrowing costs surged to a euro-era record and French bonds’ spread to Germany’s widened. Oil extended losses in afternoon trading as U.S. stocks fell, sending the Standard & Poor’s 500 Index down for a second day.

“There is a lot of uncertainty about what’s going to happen with the euro in general and that certainly makes folks concerned about potential recession in Europe,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “The fundamental picture really did not look that bullish.”

Crude for December delivery fell $3.77 to settle at $98.82 a barrel on the New York Mercantile Exchange. The contract expires tomorrow. The January contract, which traded at more than twice the December volume, fell 3.6 percent to $98.93.

Oil ended at $102.59 yesterday, the highest price since May 31, after Enbridge Inc. and Enterprise Products Partners LP said they will reverse the direction of the Seaway pipeline, adding an outlet to transport oil from the central U.S. and Canada to the coast of the Gulf of Mexico.

The pipeline reversal may ease a bottleneck at the Cushing, Oklahoma, storage hub that has lowered the price of benchmark West Texas Intermediate against other oils.

Brent Premium Shrinking

Brent oil for January settlement fell $3.66, or 3.3 percent, to $108.22 a barrel on the London-based ICE Futures Europe exchange. Brent’s premium to West Texas Intermediate, the New York benchmark, widened 1 cent to $9.29, down from a record $27.88 on Oct. 14 and from $13.02 on Nov. 15, the day before the Seaway reversal announcement.

Goldman Sachs Group Inc. said Brent’s premium to WTI will shrink to $6.50 a barrel sooner than it had estimated, citing the reversal. The spread will narrow to that level in six months, half the time the bank forecast previously, David Greely, a New York-based managing director, said in an e-mailed report.

Spanish bonds sank today, driving 10-year yields to 6.75 percent, the highest since before the euro was introduced, as borrowing costs climbed to the most in at least seven years at an auction of securities. Spanish Finance Minister Elena Salgado said today the economy will grow about 0.8 percent this year, less than the government’s target.

In France, the extra yield, or spread, that investors receive for holding 10-year French debt instead of benchmark German bunds reached 2 percentage points for the first time in the shared currency’s history as the country sold 6.98 billion euros of notes.

‘Weakening Outlook’

“We expect the euro zone to get into recession next year,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “I don’t think prices fully reflect the weakening outlook for Europe.”

The European Central Bank bought Italian debt today as part of efforts to halt the debt crisis.

The European Union accounted for 16 percent of world oil demand in 2010, according to BP Plc’s annual Statistical Review of World Energy.

“There is definitely some underlying concern about Europe and that’s providing resistance to oil prices,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “You are seeing some profit-taking today.”

Equities Decline

Oil also declined as U.S. stocks fell for a second day. The S&P index and the Dow Jones Industrial Average both fell more than 1.5 percent as of 3:45 p.m. New York time. The Standard & Poor’s GSCI Index of 24 raw materials declined 2.9 percent to 653.60.

Oil pared losses in earlier trading as U.S. economic data signaled growth. Applications for jobless benefits decreased 5,000 in the week ended Nov. 12 to 388,000, the lowest level since April, and housing construction permits climbed to the highest level since March 2010, U.S. government data showed.

“The economic numbers were really positive,” said Carl Larry, president of Oil Outlooks & Opinions LLC in New York. “If we didn’t rally to $103 yesterday, we would have rallied to $103 today.”

The U.S. is the world’s largest oil consumer, using 19.1 million barrels a day in 2010, or 21 percent of global demand, according to BP Statistical Review.

Oil volume in electronic trading on the Nymex was 787,140 contracts as of 2:46 p.m. in New York. Volume totaled 1.22 million contracts yesterday, 81 percent higher than the three- month average. Open interest was 1.35 million contracts.

--With assistance from Grant Smith in London, Alexander Kowalski in Washington. Editors: Richard Stubbe, Bill Banker

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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