Bloomberg News

Oil Declines on Speculation Debt Crisis Will Curb Demand

June 05, 2012

Oil dropped on speculation Europe’s debt woes would curb energy demand after manufacturing in the continent contracted as global policy makers discuss the region’s crisis.

West Texas Intermediate futures fell, giving up earlier gains of as much as 1.1 percent. Euro-area services and manufacturing output contracted in May, adding to signs the economy is suffering from worsening debt. Finance ministers and central bank governors from the Group of Seven countries will hold a call today on the European debt crisis, according to Canadian Finance Minister Jim Flaherty.

“Emergency talks for the G7 are a little bit dangerous because they raise expectations,” Ole Hansen, senior manager of trading advisory at Saxo Bank A/S, said by phone from Copenhagen. “Europe can go from bad to worse and China is obviously slowing. These two areas have a significant impact for general demand of most commodities, including oil.”

Crude for July delivery fell as much as 67 cents to $83.31 a barrel in electronic trading on the New York Mercantile Exchange and was at $83.51 at 12:25 p.m. London time. The contract yesterday rose for the first time in five days by 0.9 percent to $83.98. Prices are 16 percent lower this year.

Brent oil for July settlement fell as much as 1.2 percent to $97.68 a barrel on the London-based ICE Futures Europe exchange after dropping to the lowest intraday level in more than a year yesterday. The European benchmark’s premium to West Texas was at $14.50, narrowing from $14.87 yesterday.

Manufacturing Dropped

A composite index based on a euro-area survey of purchasing managers in both services and manufacturing dropped to 46 in May from 46.7 in April, London-based Markit Economics said today, compared with an estimate of 45.9. The indicator has remained below 50, indicating contraction, for four months.

The data showed European companies are cutting back on hiring and spending as the intensifying fiscal crisis makes the economic outlook more uncertain.

Producers in the Organization of Petroleum Exporting Countries are likely to maintain oil supplies at current levels when they meet in Vienna this month, Maria van der Hoeven, the executive director of the International Energy Agency, said today in an interview in Kuala Lumpur at the World Gas Conference.

“It’s likely that they’ll be unwilling to do anything that might risk prematurely tightening markets once again at a time of such economic uncertainty,” van der Hoeven said. “We are fairly confident that OPEC’s decision will be as it has been until now, to supply the market as they did.”

Geopolitical Issues

Prices are unlikely to collapse as they did in 2008 because long-term fundamentals haven’t changed and supply will struggle to meet a projected increase in global demand, Peter Voser, chief executive officer of Royal Dutch Shell Plc, said at the same conference.

“The softening of the oil price at the moment is a reflection of some of the geopolitical issues being less dominant and the lower demand outlook,” Voser said. “The long- term fundamentals haven’t changed, which means that most probably, given energy-demand growth in the world in the longer term, supply will struggle to keep pace.”

U.S. stockpiles probably fell 1 million barrels last week, the first decline in 11 weeks, as refineries boosted gasoline output to meet peak summer demand, according to a Bloomberg News survey before an Energy Department report tomorrow. Supplies rose to a 22-year high in the week ended May 25.

“We would like to see some of that substantial stockpile reduced,” said Michael McCarthy, a chief market strategist at CMC Markets Asia Pacific Pty in Sydney. “West Texas has moved back into an old trading range between $82 and $88 a barrel and I expect those bounds to hold the contract over the course of this week.”

To contact the reporter on this story: Lananh Nguyen in London at lnguyen35@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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