Bloomberg News

Crude Futures Decline as G-20 Rejects Europe Request, IMF Warns on Economy

February 27, 2012

Oil fell for the first time in eight days after the Group of 20 nations rebuffed calls from euro countries to increase lending resources, adding to concern that Europe’s debt crisis will slow the economy and reduce demand.

Prices dropped 1.1 percent as the G-20 said Europe needs to review its financial firewall before the group considers boosting the International Monetary Fund’s resources. IMF Managing Director Christine Lagarde warned the world economy is “not out of the danger zone” amid fragile financial systems and rising oil prices.

“We’ve got a range of fundamental factors that are bearish and Europe is in that category,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “We had been rising sharply day after day and prices have reached a level where traders are afraid to buy more.”

Oil for April delivery fell $1.21 to settle at $108.56 a barrel on the New York Mercantile Exchange. The contract rose to a nine-month high on Feb. 24. Prices have increased 9.8 percent this year.

Brent oil for April settlement declined $1.30, or 1 percent, to $124.17 on the London-based ICE Futures Europe exchange. Both grades fell further in electronic trading after the settlements, with WTI down 2 percent and Brent down 1.7 percent.

“You have the IMF warning about the world economy and the worries about Europe are starting to re-emerge,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The market went a little too far on the upside and it’s now pulling back a bit.”

G-20 Rejection

The G-20 rebuffed German-led calls to help Europe fight its debt crisis, saying yesterday in Mexico City that any decision on outside aid hinges on the euro area delivering more financial firepower within two months.

Lagarde said that G-20 countries “must now strengthen resilience to further shocks that could result from still fragile financial systems, high public and private debt, and higher world oil prices.”

U.S. oil demand was 18.1 million barrels a day in the four weeks ended Feb. 17, according to the Energy Department, a 14- year low and 17 percent below the record set in 2007. The International Energy Agency on Feb. 10 cut its 2012 global oil demand forecast for a sixth month.

Technical Indicators

Crude also slipped after the 14-day relative strength index for front-month contracts climbed to 76.9 on Feb. 24, according to data compiled by Bloomberg. A reading above 70 indicates futures have risen too quickly and further gains aren’t sustainable. Today’s 14-day RSI dropped below 71.

“Technical indicators, the RSI for example, are pointing to a little bit overbought,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.

Nymex-traded West Texas Intermediate’s discount to Brent crude narrowed for a third day as Calgary-based TransCanada (TRP) said it will build a $2.3 billion stand-alone pipeline from the oil storage hub at Cushing, Oklahoma, to the Gulf Coast that may be in operation by mid-2013.

The segment will help to relieve oversupply in the U.S. Midwest. Cushing is the delivery point for Nymex oil futures. A lack of pipeline capacity between Cushing and the Gulf Coast, where most refineries are located, has caused U.S. oil to trade at a discount to imports.

‘Raising Hopes’

The Keystone XL project, which would expand the amount of oil that can be shipped from Canada and extend the system to Texas refineries, was rejected by the Obama administration in January. The planned segment from Cushing to Port Arthur, Texas, wouldn’t require State Department approval.

“This is raising hopes that the bottleneck from Cushing to the Gulf Coast is coming to an end,” said Phil Flynn, an analyst at PFGBest in Chicago.

WTI’s discount to Brent narrowed 9 cents to $15.61 a barrel. The spread was $19.02 on Feb. 6. It reached $28.08 in intraday trading on Oct. 14 amid a glut of crude in the central U.S. that pushed crude inventories at Cushing as high as 41.9 million barrels last year.

Hedge funds and other large speculators raised wagers on rising prices in futures and options combined by 11 percent to 259,162 in the week ended Feb. 21, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Bets increased 26 percent over two weeks, the biggest gain since March.

Electronic trading volume on the Nymex was 621,630 contracts as of 3:27 p.m. in New York. Volume totaled 798,279 contracts on Feb. 24.

To contact the reporter 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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