Oil Decreases on Slowing Fuel Demand; South Korea Sees ‘Downside’ Risk

Oil dropped from a two-day high in New York amid signs a surge in fuel prices in the last year is slowing growth in economies including the U.S., the world’s biggest crude-consuming nation.

Futures slid as much as 1.1 percent today. South Korea said unstable oil prices are a “major downside risk” a day after the International Energy Agency reduced its 2011 oil demand estimate for the first time. U.S. consumer sentiment declined and retail sales rose at the slowest pace in nine months as households paid almost $4 a gallon at the pump.

“The high cost of gasoline is shutting the economy down, and that’s prevalent in the numbers that are coming across,” said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, who predicted oil will average $100 a barrel this year. “The data doesn’t support oil.”

Crude for June delivery fell as much as $1.10 to $97.87 a barrel in electronic trading on the New York Mercantile Exchange, and was at $98.47 at 12:21 p.m. Singapore time. Yesterday, it rose 76 cents to $98.97, the highest settlement since May 10. Prices are up 1.4 percent this week and 33 percent in the past year.

Brent oil for June settlement slid 13 cents, or 0.1 percent, to $112.85 a barrel on the London-based ICE Futures Europe exchange.

IEA Forecast

South Korea’s central bank said unstable oil prices are a “major downside risk” as it unexpectedly kept its benchmark interest rate on hold.

The Paris-based IEA reduced its estimate for this year’s worldwide fuel consumption by 190,000 barrels a day, or 0.2 percent, in its monthly market report yesterday. Demand will still grow by 1.3 million barrels a day, or 1.5 percent, to 89.18 million a day compared with 2010.

“We’ve gotten crude prices to a point where we start to think about demand destruction,” said John Vautrain, a senior vice-president at energy consultants Purvin & Gertz Inc. in Singapore. “It’s getting up to a point where people are starting to be hurt. In the U.S. in particular, gasoline demand has gone wobbly.”

U.S. retail sales rose 0.5 percent, the smallest gain since July, after a 0.9 percent March advance that was more than double the previous estimate, Commerce Department figures showed yesterday. The Bloomberg Consumer Comfort Index dropped to minus 46.9 in the period to May 8, the lowest reading since March.

Gasoline Demand

Gasoline fell for a third day after the IEA said fuel demand in North America will decline this year by 190,000 barrels to 23.7 million a day and on speculation refineries won’t be as affected by the swollen Mississippi River as previously thought.

The IEA lowered its forecast for the region by 220,000 barrels a day from last month’s report, citing lower growth projections from the International Monetary Fund.

Gasoline for June delivery dropped 0.5 percent to $3.0482 a gallon in New York. Futures have advanced 39 percent in the past year. Regular retail gasoline in the U.S. rose 2.2 cents to $3.984 a gallon on May 11, AAA said on its website, 38 percent higher than a year earlier.

Gasoline demand in the U.S., in terms of products shipped by refiners, fell to 8.83 million barrels a day in the week ending May 6, the Energy Department said on May 11. That’s the lowest since the week of Feb. 4

Floodwaters rolling south down the Mississippi drove the crest in Memphis to 47.87 feet (14.6 meters), just under the record 48.7 feet set in 1937. The deluge threatens to set more high-water marks before the flow splits in Louisiana, with 70 percent remaining in the channel and 30 percent running down the Atchafalaya River.

Open Interest

Gasoline surged 6.1 percent on May 9, the most since July 2009, on concern production and distribution would be crippled by the flood.

Open interest in crude futures on the New York Mercantile Exchange rose to a record 1.664 million contracts, exceeding the 1.662 million on May 9, according to data compiled by Bloomberg. Volume was 867,272 contracts, after 1.02 million on May 11, 40 percent above the average of the past three months.

Brent, the European benchmark, traded at a premium of $14.36 a barrel to U.S. futures. The difference between front- month contracts in London and New York surged to a record $19.54 on Feb. 21. It averaged 76 cents last year.

To contact the reporters on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net; Yee Kai Pin in Singapore at kyee13@bloomberg.net

To contact the editor responsible for this story: Jane, Ching Shen Lee at jalee@bloomberg.net

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