Crude Oil Falls From Five-Month High on Signs Europe Crisis Is Spreading

Oil fell from a five-month high in New York as Spain’s borrowing costs surged, heightening concern that Europe’s debt crisis is spreading and will hurt demand.

Futures fell as much as 2.5 percent after Spain sold 3.56 billion euros ($4.8 billion) of a new 10-year benchmark bond at an average yield of almost 7 percent, the most since the euro’s creation. Oil surged yesterday after the Energy Department said U.S. crude stockpiles declined for a second week and Enbridge Inc. said it will reverse the direction of the Seaway pipeline, adding an outlet to transport from the central U.S. and Canada to the coast of the Gulf of Mexico.

“We expect the euro zone to get into recession next year,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, who expects the price of Brent to slip to $100 a barrel by the end of the year. “I don’t think prices fully reflect the weakening outlook for Europe. There’s still some geopolitical fears priced in with Brent at $112.”

Crude for December delivery fell as much as $2.58 to $100.01 a barrel in electronic trading on the New York Mercantile Exchange and was at $101.04 at 1:19 p.m. London time. Earlier it reached $103.37, the highest price since May 31. Prices have gained 11 percent this year, after increasing 15 percent in 2010.

Brent oil for January settlement on the London-based ICE Futures Europe exchange was down $2.26, or 2 percent, at $109.62 a barrel. The European contract was $8.55 higher than West Texas Intermediate crude. The premium narrowed earlier to as little as $7.90, the least since March 9, and is down 70 percent from its Oct. 14 record-high settlement of $27.88.

U.S. Supplies

Enbridge and Enterprise Products Partners LP, the other owner of the 500-mile (800-kilometer) Seaway pipeline, will reverse the north-flowing line that extends from Houston-area refineries on the Gulf of Mexico to Cushing, Oklahoma. This may reduce stockpiles from the storage depot by opening access to refiners on the Texas coast.

Goldman Sachs Group Inc. said Brent’s premium to West Texas will shrink to $6.50 a barrel sooner than it had estimated, citing the pipeline reversal. The spread will narrow to that level in six months, half the period the bank forecast previously, David Greely, a New York-based managing director, said in an e-mailed report.

Supplies at Cushing increased for the fifth time in six weeks, rising to 32 million barrels in the period to Nov. 11, according to yesterday’s Energy Department report.

Chart Resistance

Total U.S. crude inventories dropped 1.1 million barrels to 337 million, the report showed. Gasoline supplies rose 992,000 barrels, near a median 1 million-barrel gain predicted by analysts in a Bloomberg News survey. Distillate-fuel stockpiles, including diesel and heating oil, fell 2.1 million barrels to 133.7 million.

Oil has technical resistance at $103.39 a barrel, near where yesterday’s rally was halted, according to data compiled by Bloomberg. On the weekly chart, that’s the 61.8 percent Fibonacci retracement of the intraday decline to $32.40 in December 2008 from a record high of $147.27 in July that year. The 14-day relative strength index climbed above 70 for the first time since April 8, signaling further gains aren’t sustainable. The reading was 73.5 today.

“The market should oscillate around $100 for a while,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who sees resistance to prices at $102. “Overhanging the market is the concern that this contagion in Europe will continue to flare up.”

The U.S. is the world’s largest oil consumer, using 19.1 million barrels a day in 2010, or 21 percent of global demand, according to BP Plc’s annual Statistical Review. The European Union consumed 16 percent.

To contact the reporters on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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