Oil Falls as Federal Reserve Maintains Record Stimulus, Dollar Strengthens

Crude oil dropped after the Federal Reserve said it would retain its plan to buy $600 billion of Treasuries by June, strengthening the dollar.

Futures fell 0.4 percent as the Open Market Committee said today that it would maintain the program because the economic recovery is insufficient to bring down unemployment. An Energy Department report tomorrow may show that oil supplies dropped last week, according to a Bloomberg News survey.

“There were rumors that the Fed would increase the stimulus beyond the $600 billion,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “The dollar has strengthened some since the announcement.”

Crude oil for January delivery declined 33 cents to settle at $88.28 a barrel on the New York Mercantile Exchange. Futures are up 27 percent from a year ago. Prices reached $90.76 a barrel on Dec. 7, the highest level since October 2008.

Brent crude oil for January settlement increased 2 cents to end the session at $91.21 a barrel on the London-based ICE Futures exchange.

The U.S. currency rose 0.1 percent to $1.3383 per euro at 2:49 p.m. in New York. Earlier, the dollar dropped as much as 0.8 percent to $1.3499, the lowest level since Nov. 23. A stronger dollar reduces the appeal of commodities as an alternative investment.

The Fed agreed to expand bond purchases last month, a move called quantitative easing, to increase economic growth.

“We’re getting some good economic news, which will enable the Fed to refrain from increasing quantitative easing, and potentially pull back in the future,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

U.S. Optimism

Optimism among U.S. chief executives in the fourth quarter rose to the highest level since the start of 2006 as business leaders projected increased sales, investment and hiring, a private survey showed. The Business Roundtable’s economic outlook index climbed to 101, the Washington-based group said today. Readings higher than 50 signal an expansion.

Gasoline inventories increased 2 million barrels in the week ended Dec. 10, according to the median of 17 analyst responses in a Bloomberg News survey. Crude-oil supplies probably dropped 2.5 million barrels. Analysts were split over whether stockpiles of distillate fuel rose or fell.

Gasoline for January delivery declined 2.2 cents, or 1 percent, to $2.2964 a gallon in New York, the lowest settlement since Nov. 30.

“The failure to stay above $90 last week hangs over the market,” said Addison Armstrong, director of market research at Tradition Energy, a Stamford, Connecticut-based broker. “At the same time we’ve got speculators trying to bid this higher, and that won’t change until they either run out of money or go somewhere else.”

Hedge Funds

Managed money, including hedge funds, commodity pools and commodity-trading advisers, increased net-long positions by 42,603 futures and options combined to 206,807 the week ended Dec. 7, the Commodity Futures Trading Commission said in its Commitments of Traders report on Dec. 10.

“We’ll continue playing around $90 and maybe strike at $100 before the year’s end,” Armstrong said.

Global oil demand has exceeded supply by more than 900,000 barrels a day on a seasonally adjusted basis since May, Goldman Sachs Group Inc. said in an e-mailed report yesterday. Goldman said it expects the world oil market to remain in deficit in the first half of next year. Crude will average $100 a barrel in 2011 and $110 a barrel in 2012, according to Goldman estimates.

Saudi Arabia, the world’s largest oil-exporting country, won’t immediately increase production when prices reach $100 a barrel, according to Banque Saudi Fransi.

“In order for Saudi Arabia to push other OPEC members to do something, prices have to remain at $100 for a long period and not only for some weeks or a month,” John Sfakianakis, chief economist at the Riyadh-based bank, said today by phone. “This is not likely to happen soon.”

OPEC Targets

The Organization of Petroleum Exporting Countries kept its output quota unchanged at a Dec. 11 meeting in Quito, Ecuador. OPEC has maintained a target of 24.845 million barrels a day since December 2008, the longest period without a change since it was first used in 1982.

Oil volume on the Nymex was 538,397 contracts as of 3:22 p.m. in electronic trading in New York. Volume totaled 692,514 contracts yesterday, close to the average of the past three months. Open interest was 1.38 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.

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