Bloomberg News

Crude Trades Near Lowest in Four Days as Merkel, Sarkozy Meet

January 09, 2012

Jan. 9 (Bloomberg) -- Oil traded near its lowest level in four days, erasing earlier gains as German and French leaders met in an attempt to revive growth in the euro region.

West Texas Intermediate futures in New York fell as much as 0.7 percent as German Chancellor Angela Merkel and French President Nicolas Sarkozy met to tighten budget rules for European governments. Oil earlier rose as much as 0.6 percent after the U.S. Joint Chiefs of Staff Chairman General Martin Dempsey said Iran is able block the Strait of Hormuz for a period of time. Nigerian oil production was threatened by pipeline thefts and oil worker strike.

“While geopolitical issues in relation to Iran provide oil price support, conversely perceptions relating to the euro zone are currently biased towards the risk of slower economic activity that would result from any perceived impasse in the conversations that Sarkozy and Merkel will have today,” said Gareth Lewis-Davies, senior energy strategist at BNP Paribas in London. “The prospect of weaker economic activity feeds into the risk of lower oil demand and hence oil prices.”

Crude for February delivery fell as much as 73 cents to $100.83 a barrel, the lowest price since Jan. 3, on the New York Mercantile Exchange, after rising to $102.15 earlier today. It was at $101.53 at 1:36 p.m. London time.

Brent oil for February settlement was at $113.04 a barrel, down 2 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to New York crude was at $11.51, the highest gap based on closing prices in almost two months.

Berlin Meeting

Merkel and Sarkozy met in Berlin to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence. Spanish 10-year yields rose by the most in almost 17 years last week.

German industrial output declined in November as factories in Europe’s largest economy produced fewer investment and consumer goods.

Production fell 0.6 percent from October, when it rose 0.8 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.5 percent drop, according to the median of 30 estimates in a Bloomberg News survey. In the year, production rose 3.6 percent when adjusted for working days.

Strait of Hormuz

Iran has the ability to block the Strait of Hormuz “for a period of time,” and the U.S. would take action to reopen it, Martin Dempsey said in an interview aired yesterday on the CBS “Face the Nation” program.

“They’ve invested in capabilities that could, in fact, for a period of time block the Strait of Hormuz,” Dempsey said. “We’ve invested in capabilities to ensure that if that happens, we can defeat that.”

A halt of shipping through the strait could send the price of Brent as high as $200 a barrel for a limited period, according to Societe Generale SA.

“A credible threat from missiles, mines, or fast attack boats is all that it would take for tanker insurers to stop coverage, which would halt tanker traffic,” Mike Wittner, the bank’s head of oil market research in New York, said in a report. “We estimate that the probability of this very high- impact event at 5 percent.”

The Iran situation may be bearish for the price of crude oil, said Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. Europe will turn to Saudi Arabia to replace supplies from Iran, whose exports will go to China, where demand is quite strong, Currie said at a conference in London today. The probability of a closure of the Strait of Hormuz is low, he said.

Nigerian Disruption

Brent oil’s premium to WTI has risen for eight consecutive days as Nigerian production outages and strikes threaten to reduce supplies of light, sweet crude.

“While much of the Iranian geopolitical issues are reflected in Brent currently, very recent news of supply disruptions to Nigerian production is supportive of Brent, given loss of production is of similar quality to light, sweet Brent,” said Lewis-Davies at BNP Paribas in London.

Royal Dutch Shell Plc declared force majeure, a legal clause that allows companies to miss deliveries because of circumstances beyond their control, on exports of benchmark Bonny Light crude in Nigeria on Jan. 5 following earlier pipeline leaks caused by oil theft. Strikes by Nigerian oil workers scheduled today risk further cutting output from Africa’s biggest producer. Brent’s premium rose to a record $27.88 on Oct. 14 as the uprising in Libya curbed that nation’s production.

Hedge-Fund Positions

Hedge funds increased bullish positions on WTI oil by 4.1 percent in the week ended Jan. 3, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Open interest advanced 3.5 percent, rising for a second week after falling in December to the lowest since May 2007, according to the CFTC.

Money managers raised bullish bets on Brent crude by 14,922 contracts in the week ended Jan. 3, according to data from ICE Futures Europe in London.

Speculative bets that prices will rise, in futures and options combined, outnumbered short positions by 96,459 lots, the London-based exchange said today in its weekly Commitment of Traders report. That’s up 18 percent from 81,537 contracts in the week to Dec. 27.

--With assistance from Ann Koh in Singapore and Grant Smith in London. Editors: John Buckley, Rachel Graham

To contact the reporters on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net; Sherry Su in London at lsu23@bloomberg.net

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net; Stephen Voss at sev@bloomberg.net


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