Crude Oil Drops to Three-Week Low as Goldman Suit Spurs Flight From Risk

Crude oil fell for a third day after the Securities and Exchange Commission sued Goldman Sachs Group Inc., causing investors to move away from risky assets such as commodities.

Oil dropped 2.2 percent as the SEC accused Goldman of fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. Crude also fell as air-traffic disruptions caused by Iceland’s Eyjafjallajökull volcano cut demand for jet fuel.

“The news about Goldman Sachs is weighing on the market,” said Chris Dillman, an analyst with Tradition Energy in Stamford, Connecticut.

Crude oil for May delivery dropped $1.79 to settle at $81.45 a barrel on the New York Mercantile Exchange. Oil lost 2.7 percent on April 16 to $83.24 a barrel, the biggest decline since Feb. 5, on the Goldman suit. Prices have retreated 6.2 percent from a 17-month high on April 6. They are up 62 percent in the past year.

Prime Minister Gordon Brown called yesterday for the U.K. Financial Services Authority to start its own probe of Goldman, saying he was “shocked” at the “moral bankruptcy” indicated in the SEC lawsuit, which was announced April 16. Germany’s financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said.

“Goldman is more about fragility of confidence than the specifics of oil,” said Michael Fitzpatrick, vice president of energy at MF Global in New York. “The market was overdue for a rundown, and it’s an acknowledgement of the fundamentals. Goldman probably exacerbated it.”

Excess Output

OPEC violating production quotas at the same time as demand from industrialized nations stagnates is spurring bets in the oil market that the 13-month rally in crude is coming to an end.

Options that profit if prices fall in the next month are 26 percent higher than wagers oil will rise. Open interest in June $50 and $60 puts to sell at those levels exceeded 129,000 contracts on April 16, dwarfing the 50,000 bets on $100 a barrel. Puts account for about 56 percent of all June options contracts compared with 51 percent a year earlier.

The Organization of Petroleum Exporting Countries may be creating a glut after output jumped 5.6 percent to 29.2 million barrels a day in March from a year earlier, according to Bloomberg estimates. Shipments will rise 0.9 percent in the four weeks ending May 1, according to tanker-tracker Oil Movements.

Airlines and oil companies have canceled orders for jet fuel as a result of the European flight disruption, according to German barge operator Maintank Schiffahrtsgesellschaft mbH.

Flight Cancellations

As many as 81,000 flights have been canceled after the April 14 eruption of Eyjafjallajökull spewed dust across Europe’s airspace, causing airports from Dublin to Moscow to shutter. Jet fuel’s premium to ICE gasoil futures declined to a three-week low of $35 a metric ton today, according to Bloomberg data.

“This sudden no-fly situation in Europe is really impacting things,” said John Kilduff, a partner at Round Earth Capital, a New York-based hedge fund that focuses on food and energy. “When you have that coupled with the new uncertainty with the Goldman Sachs situation, a lot of what this market was focusing on when it was rising is out.”

U.K. Transport Secretary Andrew Adonis told the BBC today that it may be possible to open U.K. airspace tomorrow, as reports show there has been a “dramatic reduction” in volcanic activity in Iceland.

Dollar Advances

Also weakening prices, the euro fell to a one-week low against the dollar on concern that the Goldman investigation will widen and Greece’s aid package may falter. European Union finance ministers told Greece to brace itself for the International Monetary Fund’s conditions on a bailout package.

The U.S. currency gained 0.2 percent to $1.3477 per euro at 3:28 p.m. in New York compared with $1.3503 on April 16. A stronger dollar reduces the appeal of commodities as an alternative investment. The dollar has advanced for the past three trading sessions.

Speculative net-long positions, or the difference between orders to buy and sell the commodity on the New York Mercantile Exchange, decreased 12 percent to 113,364 contracts on April 13, the commission said last week.

U.S. inventories of crude oil probably declined for a second week as imports slipped, a Bloomberg News survey showed. Supplies fell 300,000 barrels in the seven days ended April 16 from 354 million the prior week, according to the median of 10 analyst estimates before an Energy Department report this week. Five forecast a drop, four a gain and one estimated no change.

Brent crude oil for June settlement lost $1.76, or 2 percent, to $84.23 a barrel on the London-based ICE Futures Europe exchange.

Oil volume in electronic trading on the Nymex was 612,361 contracts as of 3:27 p.m. in New York. Volume totaled 952,237 contracts April 16, 45 percent above the average of the past three months. Open interest was 1.38 million contracts.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.