Crude Oil Tumbles as Economic Reports Spur Concern Over U.S., China Growth

Crude oil tumbled to a three-week low on concern economic growth in the U.S. and China will slow, curbing demand in the two largest energy-consuming countries.

Oil slipped 3.5 percent after U.S. manufacturing increased at a slower pace last month and the Labor Department reported that more Americans applied for jobless benefits last week. China’s manufacturing growth slowed for a second month in June, adding to signs the fastest-expanding major economy is cooling, according to a survey.

“The market is very sensitive right now,” said David Greely, head of energy research at Goldman Sachs Group Inc. in New York. “There’s a much more negative view of the outlook over the last two months. There definitely are concerns about growth.”

Crude oil for August delivery declined $2.68 to $72.95 a barrel on the New York Mercantile Exchange, the lowest settlement price since June 8. Futures are down 8.1 percent this year. The market is in its longest pullback since a six-day drop that ended on May 18.

Brent crude for August delivery slipped $2.67, or 3.6 percent, to end the session at $72.34 a barrel on the London- based ICE Futures Europe exchange. It also was the lowest settlement since June 8.

The Institute for Supply Management’s gauge of manufacturing fell to 56.2 in June from 59.7 a month earlier, according to the Tempe, Arizona-based group. A reading greater than 50 points to expansion. Economists had forecast the measure would fall to 59, according to the median of 81 projections in a Bloomberg News survey.

Double-Dip Recession

“We could have a double-dip recession,” said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. “Until we get some decent economic numbers, oil is going to have a hard time getting its head much above water. We’re going to get rallies in oil but every dollar up is going to be a battle because of headwinds in the U.S. economy.”

The Standard & Poor’s 500 Index declined 0.8 percent to 1,022.96 at 3:23 p.m. in New York, and the Dow Jones Industrial Average dropped 77.39 points, or 0.8 percent, to 9,696.63.

U.S. initial jobless claims increased by 13,000 to 472,000 in the week ended June 26, the Labor Department said. Economists forecast applications would fall to 455,000 from an initially reported 457,000 for the prior week, according to the median of 46 projections in a Bloomberg survey.

The Labor Department tomorrow may report payrolls fell by 130,000 in June, reflecting cuts in temporary census workers as the decennial survey nears completion, according to the median estimate of 82 economists surveyed by Bloomberg. Private payrolls, which are more revealing of labor-market conditions, probably rose by 110,000 after a 41,000 gain the prior month.

Tomorrow’s Report

“Everyone is waiting for tomorrow’s unemployment number,” said Dan Flynn, a trader at PFG Best in Chicago. “If it’s bad, crude will head for $65. It all hinges on the report.”

China’s Purchasing Managers’ Index fell to 52.1 from 53.9 in May, the Federation of Logistics and Purchasing said today in an e-mailed statement. This missed a median 53.2 estimate from 12 economists surveyed by Bloomberg News.

“We continue to expect the economy to slow down in the second half of the year, but still expect that global economic growth in 2010 and 2011 will be above average,” Greely said.

Prices also dropped because of rising fuel inventories. Gasoline inventories rose 537,000 barrels to 218.1 million in the week ended June 25, according to an Energy Department report yesterday. Supplies were forecast to decrease by 400,000 barrels, based on a Bloomberg News survey of analysts.

Fuel Demand

U.S. fuel consumption declined 2.7 percent to 19 million barrels a day, the lowest level since April, according to the department.

“The disappointing economic news has allowed the market to concentrate on the fundamental picture,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Yesterday’s unexpected fuel supply increase and weak demand numbers were very negative.”

Crude stockpiles fell 2.01 million barrels last week to 363.1 million, partly on reduced imports, the Energy Department report showed.

Tropical Storm Alex is losing power after coming ashore overnight in Mexico. The storm forced the shutdown of a quarter of the U.S.’s Gulf of Mexico oil production. At its height, Alex reached Category 2 status with winds of 100 mph (161 kph), the earliest Atlantic hurricane since 1995 and the first of the 2010 season.

Consistent Picture

“There’s not much bullish news to offset the negative economic sentiment,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It’s a consistent picture here. The only things I can point to are the shut-ins that occurred because of Alex and the drop in OPEC production.”

The Organization of Petroleum Exporting Countries’ crude- oil output decreased 157,000 barrels, or 0.5 percent, to an average 29.23 million barrels a day in June, according to a Bloomberg News survey yesterday.

Oil volume on the Nymex was 633,434 contracts at 3:10 p.m. in electronic trading in New York. Volume totaled 596,039 contracts yesterday, 23 percent less than the average of the past three months. Open interest was 1.26 million contracts.

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

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