Bloomberg News

Crude Falls Below $90 on Weaker Demand and European Debt

September 26, 2012

Oil settled below $90 a barrel for the first time in almost eight weeks as the government reported lower oil demand and on concern the worsening European crisis will reduce consumption.

Prices declined for the seventh time in eight days after the Energy Department said total U.S. fuel use decreased 1.1 percent in the four weeks ended Sept. 21 and inventories remained at the highest level for this time of the year since 1990. Stocks dropped for a fifth day and the euro weakened after the Bank of Spain said the economy is shrinking at a “significant” pace.

“The demand numbers played into the weaker economic outlook,” said Jacob Correll, a Louisville, Kentucky-based analyst at Summit Energy Inc., which manages more than $20 billion in companies’ annual energy spending. “Stocks are lower and there is the weaker economic sentiment that’s pushing crude down.”

Crude for November delivery fell $1.39, or 1.5 percent, to $89.98 a barrel on the New York Mercantile Exchange, the lowest settlement since Aug. 2. The futures, which are down 9.1 percent in eight sessions, are up 5.9 percent in the third quarter.

Brent oil for November settlement dropped 41 cents, or 0.4 percent, to $110.04 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade’s premium to West Texas Intermediate in New York widened to $20.06, the largest gap based on settlement prices since Aug. 16.

Total fuel use decreased to 18.4 million barrels a day in the four-week period, the lowest level since April 6, the Energy Department said.

‘Demand Destruction’

“We still have the issues relating to Europe, which are a greater concern as more information is released,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “The declining growth trend represents demand destruction.”

Crude inventories slid 2.45 million barrels to 365.2 million last week as imports fell, the Energy Department said. Analysts polled by Bloomberg had forecast a gain of 1.9 million barrels. Supplies are up 7.1 percent from 52 weeks earlier. Oil production rose to 6.51 million barrels a day last week, the most since January 1997.

“Even though inventories fell, I don’t think that’s enough to overwhelm what’s already going on in the market,” Correll said.

Supply, Demand

Gasoline consumption dropped 0.8 percent to 8.82 million barrels a day in the four weeks ended Sept. 21. The one-week average was 8.77 million, down from 9.18 million in the last week of August.

“The trend of crude oil is lower,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “We are out of the driving season and it’s time to be short on crude oil.”

Gasoline inventories slid for a ninth week, down 481,000 barrels to 195.8 million, and distillate fuels, which include diesel and heating oil, decreased 482,000 to 127.7 million.

“People are a little skeptical of the inventory data,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “If you are an oil trader, you’ve got to watch equities and the dollar.”

The Standard & Poor’s 500 Index (SPX) fell as much as 0.8 percent and the euro slipped as much as 0.5 percent against the dollar. A weaker euro and stronger dollar reduce oil’s appeal as an investment alternative.

Global Economy

Spain’s 10-year benchmark bond yield rose above 6 percent, approaching the levels seen before European Central Bank President Mario Draghi offered to buy struggling nations’ debt. Prime Minister Mariano Rajoy told the Wall Street Journal that he would “100 percent” seek a rescue for Spain if borrowing costs stayed “too high.”

In Japan, the biggest manufacturers probably grew more pessimistic this quarter as China’s slowdown and Europe’s crisis sapped exports, according to a Bloomberg survey of economists before the Bank of Japan (8301)’s Tankan report due to be released on Oct. 1.

Oil climbed to $100.42 in intraday trading on Sept. 14 after the Federal Open Market Committee announced a third round of quantitative easing intended to boost the economy. The Fed plans to buy $40 billion of mortgage debt a month.

“People are more and more worried about the global economy given the news from Spain and Japan,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It seems that QE3 is starting to disappoint if you look at asset prices. We’ve finally reached the end of the bull run.”

Electronic trading volume on the Nymex was 480,621 contracts as of 3:28 p.m. Volume totaled 436,492 contracts yesterday, 18 percent below the three-month average. Open interest was 1.56 million, the lowest level since Sept. 5.

To contact the reporters 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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