Oil fell for the first time in six days on concern that U.S. lawmakers will fail to avert a fiscal crisis after House Republican leaders canceled a vote on higher taxes for top earners.
Prices dropped the most in more than two weeks after House Speaker John Boehner scrapped a plan yesterday to allow higher tax rates on annual income above $1 million, yielding to anti- tax resistance within his own party. Spending cuts and tax increases totaling more than $600 billion a year are set to start in the U.S. in January unless an agreement is reached.
“Oil has been bulled up all week on hopes that the U.S. is going to resolve this problem and now it appears that there is no quick solution,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “We are running out of time and that’s got the market spooked.”
West Texas Intermediate oil for February delivery fell $1.47, or 1.6 percent, to settle at $88.66 a barrel on the New York Mercantile Exchange. The futures rose 2.2 percent this week, the sixth gain in seven weeks.
Brent for February settlement slid $1.23, or 1.1 percent, to end at $108.97 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude was at a $20.31 premium to WTI, up from $20.07 yesterday.
WTI has declined 10 percent in 2012 as a U.S. shale boom deepened the glut at Cushing, Oklahoma, America’s biggest storage hub. That has left it at an average $17.44 below Brent this year, compared with a premium of about 95 cents in the 10 years through 2010. Brent, the benchmark grade for more than half the world’s crude, has risen 1.5 percent this year.
Goldman Sachs Group Inc. (GS:US) yesterday increased its three- month forecast for Brent oil’s premium to WTI by $10 a barrel after a Bloomberg report that the upgrade of the largest crude unit at BP Plc (BP/)’s Whiting refinery was delayed.
House members and senators won’t vote on the end-of-year budget issues until after Christmas, giving them less than a week to reach agreement to avert a budget crisis. To get a tax- and-spending deal, Boehner must gain enough support from Republicans to keep control of his party while relying on Democrats for the votes needed to send any measure to President Barack Obama.
“Boehner clearly is weakened,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “He couldn’t even deliver any tax increase. It’s clear that you will go past Jan. 1 without an agreement.”
The failure of what Boehner called Plan B demonstrated the clout of anti-tax Republicans. The Congressional Budget Office has said that failing to resolve the issue would probably lead the U.S. economy, the world’s biggest oil consumer, to a recession in the first half of 2013.
“Recession means $50 oil,” said O’Grady. “Up to this point, the market had been kind of thinking that there would be a deal.”
U.S. consumer confidence fell in December to a five-month low as Americans grew more concerned about the possibility of higher taxes next year. The Thomson Reuters/University of Michigan consumer sentiment index decreased to 72.9, the weakest since July, from 82.7 in November.
The Standard & Poor’s 500 Index dropped as much as 1.5 percent. The dollar strengthened against the euro as investors sought perceived safety. A stronger dollar and weaker euro reduce oil’s appeal as an investment alternative.
“The petroleum markets are coming under selling pressure on equity market weakness and U.S. dollar strength” after the failure of Plan B, said Tim Evans, an energy analyst at Citi Futures Perspective in New York, in an e-mail.
Oil also dropped as Saudi Arabian Oil Minister Ali al-Naimi said demand for crude matches supply and the global market is stable.
The oil market is “functioning well” and “supply is adequate,” Naimi said in Cairo before tomorrow’s meeting of the Organization of Arab Petroleum Exporting Countries.
“The Saudi Arabian oil minister’s comments were a little bit negative,” said Tom Pawlicki, director of market research at Chicago-based commodities trading firm EOXLive. “Oil was getting ahead of itself too long on the upside.”
Electronic trading volume on the Nymex was 304,258 contracts as of 3:21 p.m., 35 percent below the 100-day average at that time. Volume totaled 366,474 yesterday. Open interest was 1.48 million, the least since Nov. 19.
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