Bloomberg News

Oil Heads for Second Weekly Loss on Europe; Mirae Sees Iran Risk

November 26, 2011

Nov. 25 (Bloomberg) -- Crude headed for a second weekly loss in New York as concern that Europe’s worsening debt crisis will trigger a recession outweighed political tensions in oil- producing Middle East nations.

Futures have lost 2.3 percent this week as Portugal and Hungary’s credit ratings were cut and Germany again ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the turmoil. Prices may jump amid France’s call for an embargo on crude exports from Iran, according to Mirae Asset Securities Ltd. Four people died in clashes this week between Shiite Muslims and Saudi security forces in the oil-rich Eastern Province.

“Oil is taking a beating,” said Filip Petersson, a commodities strategist at SEB AB in Stockholm, who predicts Brent will average $115 a barrel this quarter. “It comes down to the macro shockwaves, centered around developments in Europe. But there’s still a significant risk premium, with sanctions on Iran and unrest in Egypt and Syria.”

Crude for January delivery fell to as low as $94.99 a barrel in electronic trading on the New York Mercantile Exchange, its lowest since Nov. 9. It was at $95.18 at 1:06 p.m. in London, down 1 percent from the settlement on Nov. 23. Floor trading was closed yesterday for the U.S. Thanksgiving Day holiday and electronic trades will be booked with today’s transactions for settlement purposes.

Brent oil for January settlement on the London-based ICE Futures Europe exchange dropped as much as 1.6 percent, or $1.70, to $106.08 a barrel. Prices are down 1.2 percent this week. The European benchmark was at a premium of $11.07 to New York-traded West Texas Intermediate futures. The spread reached a record $27.88 on Oct. 14.

Ratings Cut

Portugal’s debt rating was cut to junk grade by Fitch Ratings yesterday and Hungary also lost its investment grade at Moody’s Investors Service. Euro bonds are “not needed and not appropriate,” German Chancellor Angela Merkel said at a press conference in Strasbourg yesterday.

The European Union accounted for 16 percent of world oil demand in 2010, according to BP Plc’s annual Statistical Review of World Energy. The U.S. consumed 19.1 million barrels a day, or 21 percent of the global total.

Oil gained 0.7 percent in London yesterday. The Saudi Press Agency cited a Ministry of Interior statement saying two people were killed during an exchange of gunfire at the funeral of two others who died earlier this week in the al-Qatif region.

Saudi Arabia’s Shiite minority is concentrated in the kingdom’s eastern oil-producing hub, which lies across a 16-mile (26-kilometer) causeway from Shiite-majority Bahrain, where there were clashes in February and March as security forces crushed protests demanding democracy.

Geopolitical Premium

Oil may rise this winter as France’s call for a European embargo on crude supplies from Iran increases a geopolitical premium on prices, according to Gordon Kwan, head of energy research at Mirae in Hong Kong.

Iran “has a grip” over the Strait of Hormuz, through which about a third of seaborne oil cargoes from the Middle East passes, Kwan said in e-mailed comments today. Potential military confrontations over Iran’s nuclear program will keep Brent about $10 to $15 a barrel higher than New York futures, he said.

“The oil market has been very complacent about the black swan risk of Iran,” Kwan said. “Escalation of rhetoric towards Iran’s nuclear program has supported oil prices in recent weeks, competing with the gloomy economic headlines as the main driver of oil prices.”

A Bloomberg News survey of traders and analysts forecast that prices may fall next on concern that European sovereign debts will pose increasing risks to the region’s growth. Sixteen of 28 analysts, or 57 percent, forecast oil will fall through Dec. 2. Seven, or 25 percent, predicted a gain, and five said there will be little change. Last week, 50 percent of those surveyed projected a drop.

--With assistance from Ann Koh in Singapore and Justin Doom in New York. Editors: Rachel Graham, Raj Rajendran

To contact the reporters on this story: 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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