Oil Falls From Two-Year High on Speculation China May Raise Interest Rates

Oil fell the most in more than three weeks on speculation China will raise interest rates, curbing demand growth in the world’s biggest energy-consuming country.

Futures slipped 3.3 percent after Chinese stocks tumbled on a report yesterday that showed consumer prices climbed 4.4 percent from a year earlier, the fastest pace since 2008. China’s central bank may increase rates within weeks, according to a Bloomberg News survey.

“Anything that provides evidence of a slowing Chinese economy is likely to be reflected in oil-demand estimates,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “It would also tend to moderate bullish views for where oil prices will be in 2011.”

Crude oil for December delivery fell $2.93 to settle at $84.88 a barrel on the New York Mercantile Exchange. Futures, dropped 2.3 percent this week, leaving them up 10 percent from a year ago.

Brent crude oil for December settlement slipped $2.47, or 2.8 percent, to end the session at $86.34 a barrel on the ICE Futures Europe exchange in London. The contract expires Nov. 15. The more actively traded January futures fell $2.57, or 2.9 percent, to $86.53.

Two-thirds of investors surveyed in the latest Bloomberg Global Poll say a bubble is inflating property values in China, where the economy grew at a 9.6 percent annual rate in the third quarter.

Asset Bubbles

“Oil fell on the prospect that China will raise interest rates,” said Addison Armstrong, director of market research at Tradition Energy, a Stamford, Connecticut-based broker. “They are going to do what they can to make sure asset bubbles don’t occur.”

The Standard & Poor’s 500 Index slipped 1.1 percent to 1,200.49 at 3:09 p.m. in New York, and the Dow Jones Industrial Average fell 0.7 percent to 11,201.62.

New York oil climbed to $88.63 yesterday, the highest intraday price since Oct. 9, 2008, after a report showed that Chinese refineries processed a record amount of crude last month. Plants used 12 percent more oil in October than a year earlier, according to China Mainland Marketing Research Co.

“We’ve had a nice long run higher and this might look like a good time for investors to exit the market,” Armstrong said. “Oil is down along with the dollar today. The correlation between the dollar and the oil market may be breaking down. We may be returning to trading on the fundamentals.”

The dollar fell 0.2 percent to $1.3699 per euro today. A weaker U.S. currency can spur demand for commodities as an alternative investment.

Commodities Decline

The Thomson Reuters/Jefferies CRB Index of 19 commodities fell 3.6 percent to 303.6, the biggest drop since April 20, 2009. All of the commodities decreased.

“There was a sense that economic growth in China would tighten all of the commodity markets,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Anything that reduces growth there pulls the rug out from under the huge run-up in prices.”

Global oil demand will climb by 2.3 million barrels a day to 87.3 million this year, the Paris-based International Energy Agency said in a monthly report today. That’s up 200,000 barrels from the projection in October. Chinese consumption will climb 800,000 barrels a day to 9.2 million in 2010, the report showed.

Non-OPEC Output

Oil supplies from outside the Organization of Petroleum Exporting Countries will be higher than previously estimated next year on stronger output from North America and China, the IEA said. Non-OPEC producers will provide 53.4 million barrels a day in 2011, or 250,000 barrels more than the agency’s estimate a month ago.

Futures may rise next week after an Energy Department report on Nov. 10 showed U.S. crude and fuel inventories tumbled, a Bloomberg News survey showed. Sixteen of 37 analysts and traders, or 43 percent, forecast crude will climb through Nov. 19. Twelve respondents, or 32 percent, predicted prices will decline and nine estimated there would be little change.

Oil volume on the Nymex was 756,117 contracts as of 3:11 p.m. in electronic trading in New York. Volume totaled 746,068 contracts yesterday, 5.1 percent above the average of the past three months. Open interest was 1.48 million contracts.

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

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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