Oil Drops for Third Day as German Production Slips, Iran Threat Eases

Oil dropped a third day as German industrial output declined, signaling that growth in Europe’s largest economy may have stalled, and as concern eased that Iran will block crude shipments from the Persian Gulf.

Futures fell 0.3 percent after Germany said production (GRIPIMOM) declined 0.6 percent in November. The probability of Iran closing the Strait of Hormuz is low and Saudi Arabia will probably raise oil output, Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. (GS), said in London today.

“The European economy doesn’t look good and that’s going to hurt oil demand,” said Kyle Cooper, director of research with IAF Advisors in Houston. “Although the U.S. economy is performing better, petroleum demand isn’t looking good.”

Oil for February delivery fell 25 cents to $101.31 a barrel on the New York Mercantile Exchange, the lowest settlement of 2012. Futures are up 15 percent in the past year.

Brent oil for February settlement decreased 61 cents, or 0.5 percent, to end the session at $112.45 a barrel on the London-based ICE Futures Europe exchange. The European contract’s premium to Nymex crude narrowed to $11.14 a barrel today. The spread surged to a record high of $27.88 on Oct. 14.

German manufacturing was projected to slip 0.5 percent, according to the median of 30 estimates by analysts in a Bloomberg News survey (GRIPIMOM).

The International Monetary Fund will probably cut its forecast for global growth, Managing Director Christine Lagarde said Jan. 6. German growth will slow to 0.6 percent in 2012 from 3 percent last year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19.

Berlin Conference

German Chancellor Angela Merkel and French President Nicolas Sarkozy outlined the increased pace of their response to the financial crisis. Merkel and Sarkozy said euro-area leaders may complete their new budget rulebook by Jan. 30, one month ahead of schedule, and are considering accelerating capital contributions to the bailout fund being set up this year.

The situation regarding Iran is bearish for the price of crude oil, Goldman’s Currie said. Europe will turn to Saudi Arabia to replace supplies from Iran, whose exports will go to China, where demand is quite strong, Currie said at a conference in London today.

“Geopolitics have trumped market fundamentals lately,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “Prices will fall a great deal when the Iran situation calms down.”

A halt of shipping through the strait might send the price of Brent as high as $200 a barrel for a limited period, according to Societe Generale SA. (GLE)

The waterway carries 17 million barrels of oil a day, according to the U.S. Energy Department, almost 20 percent of global consumption.

Pipeline Delay

A pipeline that would allow oil from the United Arab Emirates to bypass the Strait of Hormuz has been delayed by construction difficulties, two people with knowledge of the matter said. Abu Dhabi, holder of most of the U.A.E.’s crude reserves, had planned to start exports in January 2011 through the pipeline to a port outside the strait, Dieter Blauberg, the project’s former director, said in May 2009.

“It’s unfortunate that the pipeline that would allow Abu Dhabi oil to avoid the strait has been delayed,” said Chris Faulkner, president of Breitling Oil & Gas in Irving, Texas, an independent producer focused on North America. “If there were a move by Iran to close the strait the move would be significant. Prices would climb $20 to $30 in 15 minutes.”

U.S. Economy

Last week the U.S. Labor Department reported the economy added 200,000 jobs in December and the unemployment rate fell to 8.5 percent. Fuel demand dropped fell 2.6 percent to 18 million barrels a day in the week ended Dec. 30, down 5.7 percent from a year earlier, according to the Energy Department.

“U.S. economic prospects have looked brighter lately but that hasn’t been reflected in the weekly numbers,” Mueller said. “There will be a lot more supply in 2012, with non-OPEC producers such as the U.S. and Brazil increasing output and Libya recovering faster than anyone forecast.”

Oil supply from non-OPEC producers will advance 1.9 percent to an average of 53.68 million barrels a day this year, an International Energy Agency report on Dec. 13 showed. Libyan output (OPCRLIBY) rose 100,000 barrels to 700,000 a day last month, the highest level since February, according to a Bloomberg News survey of oil companies, producers and analysts.

Hedge funds increased bullish positions on oil by 4.1 percent in the week ended Jan. 3, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Open interest advanced 3.5 percent, rising for a second week after falling in December to the lowest since May 2007, according to the CFTC.

Oil volume in electronic trading on the Nymex was 582,951 contracts as of 3:21 p.m. in New York. Volume totaled 612,945 contracts Jan. 6, 1.3 percent above the three-month average. Open interest was 1.4 million contracts, the highest level since Nov. 11.

To contact the reporters 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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