Crude Oil Falls as Stagnant U.S. Employment Data Signals Weak Fuel Demand

Crude oil fell the most in two weeks, trimming a second weekly gain, after employment in the U.S. unexpectedly stagnated in August, bolstering concern that fuel demand will drop.

Futures dropped 2.8 percent after Labor Department data showed payrolls were unchanged last month, the weakest reading since September 2010. The median forecast in a Bloomberg News survey called for a gain of 65,000. Tropical Storm Lee formed today in the Gulf of Mexico, prompting companies to shut 48 percent of the area’s crude output.

“The macroeconomic data continues to indicate a deceleration of economic growth at best,” said Michael Wittner, the head of oil-market research at Societe Generale SA in New York and the third-most accurate forecaster for Brent oil among 26 analysts ranked by Bloomberg in the past eight quarters. “We’ve got a lot of weak data from around the world recently.”

Crude oil for October delivery fell $2.48 to settle at $86.45 a barrel on the New York Mercantile Exchange. It was the biggest drop since Aug. 18. Prices rose 1.3 percent this week and have gained 15 percent in the past year. There will be no Nymex floor trading on Sept. 5 because of the Labor Day holiday.

Brent oil for October settlement dropped $1.96, or 1.7 percent, to settle at $112.33 a barrel on the London-based ICE Futures Europe exchange.

The European benchmark traded at a $25.88 premium to West Texas Intermediate, the grade traded in New York. The record spread based on settlement prices is $26.21 on Aug. 19, two days before the Libyan rebels entered the capital of Tripoli.

‘Ridiculously Overpriced’

“Brent is ridiculously overpriced and WTI is too low,” said Peter Beutel, president of trading advisory company Cameron Hanover Inc. in New Canaan, Connecticut. “Two perfectly good crude grades are being ruined as benchmarks by speculators. The spread should be declining because the Libyan disruption and containment at Cushing are being alleviated.”

Oil supplies at Cushing, Oklahoma, the delivery point for WTI, fell 21 percent from a record 41.9 million in April by Aug. 26, the Energy Department said.

Estimates of the 86 economists surveyed by Bloomberg News for overall payrolls ranged from a decline of 20,000 to an increase of 160,000.

“This underscores why we’re looking for the outlook to get more bearish,” Wittner said. “A slowdown hasn’t been priced in yet, so oil should move lower.”

Oil dropped 7.2 percent on the Nymex last month amid speculation the U.S. economy is slowing. The downgrade of U.S. debt by Standard & Poor’s, political squabbling about the American budget and fears that one or more of the countries in the euro zone will default triggered a plunge in stocks last month that caused consumer confidence to sink.

Falling Confidence

“August was not a good month for the U.S. economy,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The difficulty in coming to a budget agreement hurt consumer confidence and spending in August, and this will be reflected in lower fuel demand.”

A report yesterday showed U.S. manufacturing unexpectedly grew in August. The Institute for Supply Management’s factory index fell to 50.6 in August from 50.9 in July. A reading of 50 is the dividing line between expansion and contraction.

“We’re in a holding pattern,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “The market keeps meandering based on the most recent headline. Yesterday the ISM number surprised us to the upside and now the non-farm employment number is surprising us to the downside.”

The Standard & Poor’s 500 Index decreased 2.6 percent to 1,173.16 in New York and the Dow Jones Industrial Average fell 2.2 percent to 11,242.99. The dollar rose 0.5 percent to $1.4186 against the euro.

Production Disruptions

“We’re obviously reacting pretty dramatically to the jobs number,” said Phil Flynn, vice president of research at PFGBest in Chicago. Output in the Gulf “has already been disrupted and there could be serious flooding over the long weekend.”

The storm was “nearly stationary” south of Louisiana, according to the National Hurricane Center. The system is 210 miles (338 kilometers) southwest of the mouth of the Mississippi River, the Miami-based center said today in an advisory issued at 1:35 p.m. East Coast time. Lee is moving toward the northwest at 2 miles per hour and its maximum winds are 40 mph.

Platform Evacuations

Companies including Anadarko Petroleum Corp., BP Plc, Exxon Mobil Corp. and Noble Corp. have evacuated workers from Gulf rigs and platforms. About 48 percent of Gulf oil output has been shut by the storm, the Bureau of Ocean Energy Management, Regulation and Enforcement said today.

Personnel have been evacuated from 169 production platforms and 16 rigs, the bureau said. The Gulf accounts for 27 percent of U.S. crude production.

Oil volume in electronic trading on the Nymex was 507,026 contracts as of 2:42 p.m. in New York. Volume totaled 561,414 contracts yesterday, 18 percent below the average of the past three months. Open interest was 1.53 million contracts, the highest level since Aug. 16.

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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