Bloomberg News

Oil Drops From Nine-Month High After IMF Warns on Global Economic Growth

February 27, 2012

Oil fell, halting its longest rally in two years, after a warning from the International Monetary Fund on the global economy sparked concern that prices have climbed too fast.

Futures slid as much as 1.4 percent in New York after seven days of gains. Oil’s relative strength index signaled that the longest winning streak since January 2010 may have been exaggerated. The world economy is “not out of the danger zone” amid fragile financial systems and rising oil prices, IMF Managing Director Christine Lagarde said yesterday. Prices gained the most in two months last week amid tensions with Iran, OPEC’s second-biggest producer.

“A correction is well overdue,” said Andrey Kryuchenkov, an analyst at VTB Capital in London who predicts that prices will hold at about current levels this week. Oil’s “relentless push higher could only be explained by pure supply-side fears.”

Oil for April delivery fell as much as $1.53 to $108.24 a barrel in electronic trading on the New York Mercantile Exchange and was at $108.53 at 12:40 p.m. London time. The contract gained 1.8 percent to $109.77 on Feb. 24, the highest close since May 3. Prices increased 6.3 percent last week and are 12 percent higher the past year.

Brent oil for April settlement declined $1.38 to $124.09 on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to New York-traded West Texas Intermediate was at $15.37, compared with $15.70 on Feb. 24 and a record $27.88 on Oct. 14. Last week, Brent reached record values when converted into euros or U.K. pounds as those currencies declined.

Relative Strength

New York crude’s 14-day relative strength index climbed to 76.9 on Feb. 24, the highest since April, according to data compiled by Bloomberg. A reading above 70 indicates futures have risen too quickly and further gains aren’t sustainable. Investors tend to sell contracts when prices are considered overbought. Today’s 14-day RSI is about 71.

Group of 20 nations must strengthen their economies against further shocks including higher crude prices, Lagarde said after a meeting of the G-20 in Mexico City. Rising oil prices may push inflation in South Korea, the world’s fifth-largest oil importer, above the government’s target and have a “far- reaching impact” on the economy, Finance Minister Bahk Jae Wan said at the meeting.

The G-20 rebuffed German-led calls to help Europe fight its debt crisis, saying any decision on outside aid hinges on the euro area delivering more financial firepower within two months. Progress will be assessed in April, when officials gather in Washington, the G-20 said in a statement.

Iran Threat

German lawmakers vote on a second Greek rescue package today. Europe’s biggest economy is also weighing whether to agree to beef up the region’s financial backstop to a potential 750 billion euros ($1 trillion) at a March 1-2 European summit.

Oil has advanced 12 percent this year amid concern that sanctions against Iran’s nuclear program will disrupt crude supplies from the second-biggest producer in the Organization of Petroleum Exporting Countries. Iran has threatened to shut the Strait of Hormuz, a transit route for a fifth of the world’s oil, in response to an embargo.

Russian Prime Minister and presidential candidate Vladimir Putin warned Western leaders against a military strike on Iran. Russia is concerned that there is a “growing threat” of action against Iran that would be “truly catastrophic,” he said in the latest of a series of articles published before Russia’s March 4 elections.

Hedge funds and other large speculators raised wagers on rising prices 11 percent 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.

In London, money managers raised bullish bets on Brent crude by 10,682 contracts in the week ended Feb. 21, according to weekly data from ICE Futures Europe.

Speculative bets that prices will rise, in futures and options combined, outnumbered short positions by 107,895 lots, the London-based exchange said today.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net 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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