Bloomberg News

Oil Falls After Spanish Bailout Fails to Ease Europe Debt

June 11, 2012

Oil fell to an eight-month low in New York on skepticism that Spain’s bailout plan will succeed in easing the euro region’s debt crisis, which is slowing economic growth and curbing fuel use.

Futures dropped 1.7 percent as equities and the euro declined in the first trading day after Spain asked euro-region governments for as much as 100 billion euros ($126 billion) to help shore up its banking system. Saudi Arabian Oil Minister Ali al-Naimi said there may be a need for higher OPEC output.

“There’s skepticism about the plan” for the rescue, said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The euphoria was short- lived.”

Crude oil for July delivery declined $1.40 to $82.70 a barrel on the New York Mercantile Exchange, the lowest settlement since Oct. 6. The contract increased as much as $2.54, or 3 percent, early in the session. Prices have fallen 16 percent this year.

Brent oil for July settlement dropped $1.47, or 1.5 percent, to end the session at $98 a barrel on the London-based ICE Futures Europe exchange. It was the lowest settlement since Jan. 27, 2011.

The drop in both New York oil and Brent accelerated after the settlement as equities declined. Nymex crude fell 3.1 percent to $81.52 a barrel at 4:11 p.m., and Brent decreased 2.8 percent to $96.71.

Brent Drop

Spain’s rescue request followed weeks of concern that bad loans at its banks might overwhelm public finances. Brent, a benchmark for more than half the world’s crude, has fallen 22 percent since its highest close this year on March 13, amid speculation Europe’s debt crisis will derail the economic recovery and curb fuel demand.

Spain became the fourth euro member -- following Greece, Ireland and Portugal -- to seek a bailout since the debt crisis began almost three years ago, after its borrowing costs approached euro-era highs.

“Every rescue package has less impact than the previous one,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “We need to see a solution. Either the euro has to be dissolved or we need to see Europe unify on a fiscal and economic basis.”

The euro slipped 0.3 percent against the dollar. A weaker common currency and stronger dollar curb commodities’ appeal as an alternate investment to the dollar. The Standard & Poor’s 500 Index decreased 1.3 percent and the Dow Jones Industrial Average fell 1.1 percent.

OPEC Output

The Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s crude, will keep its official daily production ceiling at 30 million barrels a day when it meets June 14 in Vienna, according to all 20 traders and analysts surveyed by Bloomberg.

Al-Naimi said “maybe” there is a need for a higher OPEC production target. He spoke as he arrived late today in Vienna.

Saudi Arabia has been trying to lower the price of oil to bolster the global economy as Western nations impose sanctions on Iran. The kingdom pumped 9.9 million barrels of crude a day in May, the highest level since at least January 1989, based on monthly data compiled by Bloomberg. Brent oil should drop to $100 as supply outweighs demand, al-Naimi said on May 13 in Adelaide, Australia, when prices were near $112.

Iran and Venezuela have criticized fellow members of the 12-country group for producing more than the existing quota. OPEC pumped 31.595 million barrels a day last month, 1.595 million more than the limit agreed to at the December meeting, according to a Bloomberg survey of oil companies, producers and analysts.

OPEC Jawboning

Venezuela is concerned about members’ non-compliance with the ceiling and will address the issue during the meeting, President Hugo Chavez told reporters on June 9. Venezuela believes that $100 a barrel is a “fair price,” he said.

“This is the kind of jawboning you expect before an OPEC meeting,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “You are sure to hear the Iranians and Venezuelans say that prices are too low and the spigots must be turned off. It’s an old pattern.”

The U.S. added seven nations to the list of countries exempted from Iran oil sanctions, Secretary of State Hillary Clinton announced today: India, Malaysia, South Korea, South Africa, Sri Lanka, Turkey and Taiwan.

They “have all significantly reduced their volume of crude-oil purchases from Iran,” Clinton said today in an e- mailed statement.

China and Singapore weren’t granted exemptions. If a country doesn’t prove it’s making necessary reductions by the end of June, any institution in that nation that settles petroleum trades through Iran’s central bank will be cut off from the U.S. banking system.

Electronic trading volume on the Nymex was 546,856 contracts as of 4:15 p.m. Volume totaled 687,726 contracts yesterday, 22 percent above the three-month average. Open interest was 1.45 million.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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