Bloomberg News

Crude Falls for First Time in Three Days on European Debt

June 18, 2012

Oil dropped for the first time in three days as the worsening European debt crisis threatened to slow global economic growth and reduce demand for crude.

Prices declined 0.9 percent as Spanish borrowing costs rose to a euro-era high. More loans went unpaid in April, Bank of Spain data showed, suggesting the country’s recession is forcing more companies and consumers into default. Weekend elections in Greece eased concern that the country will exit the euro.

“There is a bearish economic contagion in Europe and it’s essentially bringing prices down,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Although the Greek news was positive, people are more concerned now about Spain.”

Oil for July delivery fell 76 cents to settle at $83.27 a barrel on the New York Mercantile Exchange. Prices are down 19 percent in the second quarter and 16 percent this year.

Brent oil for August settlement dropped $1.56, or 1.6 percent, to $96.05 a barrel on the London-based ICE Futures Europe exchange.

The 10-year Spanish bond yield jumped above 7 percent for the first time since the creation of the euro. Bad loans as a proportion of total Spanish lending rose to 8.72 percent in April, the highest level since 1994.

Euro Declines

The euro fell 0.5 percent against the dollar. A weaker euro and stronger dollar reduce oil’s value as an investment alternative.

“Once the reality set back in and we saw bond yields climbing, oil started falling,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “If the market does trigger that $80 price, it would fall quickly another $5 to $75 or below.”

In Greece, Antonis Samaras, leader of the New Democracy party, said he and Pasok leader Evangelos Venizelos agreed on the need to forge a unity government, easing concern that Greece would reject austerity measures needed to qualify for aid.

Oil’s decline “is clearly a rejection of the Greek elections,” said Mike Fitzpatrick, editor of the Energy Overview newsletter in New York and previously an oil trader at MF Global. “The market is not going to play that game anymore.”

Global oil prices might drop 25 percent if multiple euro- area economies ran into severe difficulties at the same time, Andrew Burns, the World Bank’s director of global economic trends, said in an interview in Brussels.

Falling Demand

Oil consumption in Europe will fall 340,000 barrels a day this year and a further 230,000 in 2013, the Energy Department’s Energy Information Administration forecast in its monthly Short- Term Energy Outlook report on June 12. Demand in the U.S. will also decline in 2012, the EIA said.

Raymond James & Associates Inc. cut its forecasts for West Texas Intermediate crude and Brent oil by $12 a barrel each. WTI will average $87.63 a barrel this year and Brent $102.12, Raymond James analysts, including Marshall Adkins in Houston, said in the report. The company forecast a fourth-quarter average of $75 and a 2013 average of $65.

Oil dropped 2.4 percent in intraday trading before paring losses as stocks rebounded from their lows on speculation that central banks will move to bolster global economic growth. The Standard & Poor’s 500 Index (SPX) rose 0.1 percent at 3:21 p.m. after falling as much as 0.6 percent earlier.

Federal Reserve

Federal Reserve policy makers will meet tomorrow as slowing employment growth at home and a deepening crisis in Europe weigh on the economic outlook. Group of 20 nations are discussing a mix of measures to secure the global recovery, a Canadian official said.

“Oil is still going to be very quiet in a tight range until we get the news from the Fed,” Ilczyszyn said. “If the Fed doesn’t act, it’s going to be very bearish for oil.”

Money managers cut bullish oil wagers for a sixth week, according to the Commodity Futures Trading Commission’s Commitment of Traders Report. Net-long positions fell by 2,541, or 1.9 percent, to 130,508 futures and options combined in the seven days ended June 12.

Electronic trading volume on the Nymex was 487,614 contracts as of 3:11 p.m. in New York. Volume totaled 460,330 contracts on June 15, 17 percent below the three-month average. Open interest was 1.47 million.

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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