Bloomberg News

Oil Falls as Euro Drops Near Two-Year Low on Spain

May 29, 2012

Oil fell for the first time in three days after Egan-Jones Ratings Co. downgraded Spain’s credit, pushing the euro to the lowest level in almost two years.

Futures slipped 10 cents as Spain’s rating was cut to B from Bb-. A debate in the country about how to fund a recapitalization of the Bankia group is spurring speculation that the debt crisis that is battering Greece is spreading. Earlier, oil touched a one-week high as U.S. equities advanced.

“We had the euro just drop like a rock,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “Crude is really just affected by the currencies as the Spanish situation worsens.”

Oil for July delivery settled at $90.76 a barrel on the New York Mercantile Exchange. Prices are down 13 percent this month. Futures touched $92.21, the highest level since May 22, in intraday trading. Floor trading was closed yesterday for Memorial Day.

Brent oil for July settlement fell 43 cents, or 0.4 percent, to $106.68 a barrel on the London-based ICE Futures Europe exchange.

Spain’s 9.6 percent budget deficit, 24 percent jobless rate and bank losses of as much as 260 billion euros ($324 billion) weigh on the economy, Haverford, Pennsylvania-based Egan Jones said in an e-mailed statement.

“Spain will inevitably be faced with payments to support a portion of its banking sector and for its weaker provinces,” it said. “Assets of Spain’s largest two banks exceed its GDP.”

Euro Tumbles

The euro fell as much as 0.6 percent to $1.2461, the lowest level since July 1, 2010. A weaker euro and stronger dollar reduce oil’s appeal as an investment alternative.

The Standard & Poor’s 500 Index pared gains to 0.7 percent after rising as much as 1.3 percent.

“You have equities coming off hard and essentially you have the euro getting hammered,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “Oil is following the markets lower.”

Crude also dropped as confidence among U.S. consumers unexpectedly fell in May to the lowest level in four months. The Conference Board’s confidence index decreased to 64.9 from a revised 68.7 in the prior month, figures from the New York-based private research group showed today.

“We had poor consumer confidence numbers,” Schork said. “You’ve got a couple of headlines that suggested some weakness in the market.”

BNP Paribas Forecast

BNP Paribas SA cut its 2012 price forecast for West Texas Intermediate oil by $7 to $100 a barrel as the debt crisis worsened. The bank also reduced estimates for Brent crude by $4 to $115 a barrel, according to an e-mailed report.

“In the short term, the market may well remain in limbo without clear direction, waiting for European elections and the next OPEC meeting,” Harry Tchilinguirian and Gareth Lewis- Davies, analysts based in London, wrote in the report. “In the second half of the year, the world will live increasingly with lower spare production capacity and a more geopolitically charged environment.”

Oil ministers from members of the Organization of Petroleum Exporting Countries are scheduled to meet June 14 in Vienna.

Earlier, oil and equities rose after the S&P/Case-Shiller index of property values showed the U.S. housing market is stabilizing.

“We’re got a mixed and uncertain economic outlook but investors are looking at things with some optimism after the long weekend,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

U.S Homes

Home values in 20 cities fell at the slowest pace in more than a year in the 12 months to March. The index fell 2.6 percent from a year earlier after a 3.5 percent drop in February, the group reported today in New York.

“Crude really moved, to a large extent, hand in hand with equities,” said Kyle Cooper, director of commodities research at IAF Advisors in Houston.

New York futures fell to $89.28 on May 23, the weakest intraday level since November, from this month’s high of $106.43 on May 1.

Crude’s decline may halt near the psychological $90 level and the 38.2 percent one-year Fibonacci retracement level of $88.55, according to Richard Ross, a technical analyst at brokerage Auerbach Grayson & Co. in New York.

Electronic trading volume on the Nymex was 412,699 contracts as of 3:34 p.m. in New York. Volume totaled 273,089 contracts on May 25, the lowest level since Dec. 27 and 52 percent below the three-month average. Open interest was 1.44 million.

-- With assistance from Catarina Saraiva and Mark Shenk in New York, and Timothy R. Homan and Lorraine Woellert in Washington Editors: Margot Habiby, Dan Stets

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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