Crude-Oil Futures Tumble as Demand Outlook Dims, China Manufacturing Slows

Crude oil fell the most in six weeks on signals that economic growth is slowing in the U.S. and China, the world’s biggest energy-consuming countries.

Oil slipped 2.8 percent after China’s industrial output grew by the least in 11 months and the Federal Reserve said the U.S. recovery is decelerating. Futures extended declines after the U.S. Energy Department reported that fuel inventories climbed more than forecast last week.

“The Chinese economy is showing signs of weakness and the picture here is worsening,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The economic picture isn’t rosy. The question now is where we will find support as we move south.”

Crude oil for September delivery fell $2.23, or 2.8 percent, to $78.02 a barrel on the New York Mercantile Exchange, the lowest settlement since July 28. Futures dropped the most since July 1.

Brent crude oil for September settlement slipped $1.96, or 2.5 percent, to end the session at $77.64 a barrel on the London-based ICE Futures Europe Exchange.

China’s year-on-year industrial production growth slowed to 13.4 percent in July, the statistics bureau said in Beijing today. In June, the increase was 13.7 percent. July’s rate was the smallest since August last year after excluding distortions caused by holidays at the start of each year.

“The markets are once again responding to negative economic news from China,” said Tom Bentz, a broker at BNP Paribas Commodity Futures Inc. in New York. “Chinese industrial output isn’t growing as fast and the retail sales numbers were disappointing.”

Retail Sales

Chinese retail sales expanded at an annual pace of 17.9 percent last month, compared with 18.3 percent in June, the bureau said.

Federal Reserve policy makers yesterday announced steps to bolster an economy that it said is starting to weaken. The Fed’s Open Market Committee said in a statement that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

Equities declined on concern the U.S. economic recovery is threatened. The Standard & Poor’s 500 Index fell 2.7 percent to 1,090.89 at 3:11 p.m. in New York, and the Dow Jones Industrial Average slipped 2.3 percent to 10,395.48. The dollar surged to $1.2889 per euro, up 2.2 percent from yesterday, reducing the appeal of commodities as an investment.

‘It’s Looking Nasty’

“It looks like a possibility we’re heading down to $70,” said Blake Robben, a strategist at Lind-Waldock in Chicago, a division of MF Global Ltd. “It’s looking nasty right now and everyone is selling.”

The U.S. and China accounted for 32 percent of global oil demand in 2009, according to BP Plc, which publishes its BP Statistical Review of World Energy each June.

“In fundamental terms, the oil market is showing signs of getting a bit weaker over the next couple of years,” Simon Wardell, London-based energy research manager at IHS Global Insight, said in a Bloomberg television interview.

Gasoline supplies rose 409,000 barrels to 223.4 million last week, the seventh-straight gain, according to the Energy Department. Stockpiles were forecast to increase 250,000 barrels, according to the median estimate from 18 analysts surveyed by Bloomberg News.

Inventories of distillate fuel, a category that includes heating oil and diesel, climbed 3.46 million barrels to 173.1 million, the highest level since January 1983. Analysts projected a 1.75-million-barrel increase.

Refineries operated at 88.1 percent of capacity, down 3.1 percentage points from the prior week, the report showed. It was the biggest one-week decline since October.

Crack Spread

Increasing fuel supplies are helping narrow the margin, or crack spread, for processing three barrels of oil into two of gasoline and one of heating oil by 12 percent to $6.966 a barrel, based on New York futures prices. It’s the lowest margin since February and the biggest drop since May 21.

Crude oil supplies declined 2.99 million barrels to 355 million. Analysts forecast a 2-million-barrel drop.

“The rate of crude-oil consumption is declining, otherwise there would have been a bullish reaction to the larger-than- expected 3-million-barrel drop,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “There was a sharp increase in distillate inventories, which wasn’t needed because we already have a surplus.”

Global crude demand will average 87.9 million barrels a day in 2011, the International Energy Agency said in a monthly report today. That’s 50,000 barrels a day more than the Paris- based agency forecast in July. The IEA coordinates energy policy in 28 developed countries.

Mixed Signals

“The economic signals are pretty mixed,” David Fyfe, head of the IEA’s oil industry and markets unit, said by phone from Paris. “We’ve seen weaker industrial production in the OECD, slightly weaker indications for China. We see relatively robust oil demand growth this year but we can’t rule out completely some of the concern in the market about economic growth.”

Oil volume on the Nymex was 687,880 contracts as of 3:08 p.m. in New York. Volume totaled 732,487 contracts yesterday, the highest level since June 17 and 12 percent above the average of the past three months. Open interest was 1.27 million contracts.

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to 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.