Oil Trades Below $89 After Drop From 26-Month High on Europe Debt Concerns

Crude oil tumbled from a 26-month high after breaching the upper limit of what Saudi Arabia’s oil minister, Ali Al-Naimi, said is a satisfactory price for consumers and producers.

Oil slipped 0.8 percent after surpassing the $70-to-$90-a- barrel range that al-Naimi announced on Nov. 1. The kingdom had previously indicated a preferred target of $75 a barrel. Futures touched $90.76 earlier today following President Barack Obama’s agreement to a two-year extension of tax cuts introduced by President George W. Bush.

“The news today has been bullish, but may not be bullish enough to risk being on the wrong side of the Saudis’ $70-to-$90 range,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington.

Crude oil for January delivery declined 69 cents to settle at $88.69 a barrel on the New York Mercantile Exchange. The $1.38 gain earlier today took prices to the highest level since Oct. 8, 2008.

Brent crude oil for January settlement slipped 6 cents to end the session at $91.39 a barrel on the London-based ICE Futures Europe exchange. Futures reached $92.86, the highest level since Oct. 2, 2008.

Prices fell from the settlement after the American Petroleum Institute reported at 4:30 p.m. that U.S. gasoline supplies surged 4.8 million barrels to 220 million last week, the biggest one-week gain since Jan. 8. January oil was down $1.08, or 1.2 percent, to $88.30 a barrel in electronic trading at 5:04 p.m.

Comfortable Price Range

Most members of the Organization of Petroleum Exporting Countries, which supplies 40 percent of the world’s oil, have said they’re comfortable with the new price range.

Libya views $100 as acceptable. OPEC Secretary-General Abdalla El-Badri said prices at $100 wouldn’t necessarily damage the global recovery or prompt it to increase production unless accompanied by a supply disruption.

OPEC will meet to review its production quota on Dec. 11 in Quito, Ecuador. The group hasn’t changed its output target since 2008.

Obama said he would accept lower rates on high earners’ income, dividends, capital gains and multimillion-dollar estates for the next two years to break a stalemate over extending tax cuts for middle-class taxpayers. In addition to preserving the status quo on Bush-era policies, the proposal creates more than $300 billion in new tax cuts.

The Standard & Poor’s 500 Index advanced 0.3 percent to 1,226.19 at 3:20 p.m. in New York and the Dow Jones Industrial Average climbed 0.1 percent to 11,376.19.

Technical Trading

The failure to hold above $90 a barrel was also a signal to technical traders, who look at charts and patterns, to sell oil.

“Buying often dries up after we break through a key technical level,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “You are seeing the new longs bail out after the market failed to increase from today’s highs.” Longs are bets prices will rise.

Futures contracts between December 2011 and September 2012 were in backwardation today, with prices for future months lower than earlier months. The market had been in contango, when supplies for nearby delivery are lower than shipments for later months.

“The most interesting thing we’re seeing is the change in the curve over the last few days,” said David Greely, head of energy research at Goldman Sachs Group Inc. in New York.

West Texas Intermediate oil, the U.S. benchmark, will average $86.08 a barrel next year, up from last month’s forecast of $85.17, the Energy Department said today in its monthly Short-Term Energy Outlook. Prices in 2010 will average $78.98, 18 cents higher than November’s estimate of $78.80.

Oil Outlook

The department raised its outlook for global oil consumption next year to 87.78 million barrels a day from 87.77 million last month. The 2010 demand projection increased to 86.35 million, up from 86.33 in November.

“Economic data has been more supportive of the market recently,” Greely said. “We’re on track to see demand growth next year and in 2012, led by emerging markets.”

An Energy Department report tomorrow will show that U.S. crude oil inventories declined 1.4 million barrels last week, according to the median of 16 analyst estimates in a Bloomberg News survey. Supplies of distillate fuel, a category that includes heating oil and diesel, and gasoline also fell over the period, the survey showed.

The department is scheduled to release its weekly report at 10:30 a.m. tomorrow in Washington.

Oil volume on the Nymex was 927,594 contracts as of 5:03 p.m. in New York. Volume totaled 753,781 contracts yesterday, 8.1 percent above the average of the past three months. Open interest was 1.37 million contracts.

To contact the reporter 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.

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.