Oil Drops a Second Day on Concern Prices Near 9-Month High May Curb Demand

Oil dropped for a second day in New York on growing speculation that demand may be curbed by a rally that has driven prices to a nine-month high.

West Texas Intermediate futures slid as much as 0.9 percent after falling for the first time in six days yesterday. Demand for oil may deteriorate after London-traded Brent rose to a record high when priced in euros and pounds, according to Morgan Stanley. U.S. supplies probably rose to the highest level in five months last week, a Bloomberg News survey showed before a report from the Energy Department tomorrow.

“We do not see sustained gains from here, and the market is likely to pause,” said Andrey Kryuchenkov, an analyst at VTB Capital in London who predicts that prices will remain little changed this week. “The market has been overbought lately, with a substantial geopolitical risk premium in London, due to ongoing jitters over Iran’s controversial nuclear program.”

Oil for April delivery on the New York Mercantile Exchange declined as much 94 cents to $107.62 a barrel in electronic trading and was at $107.67 a barrel at 1:47 p.m. London time. The contract yesterday fell 1.1 percent to $108.56, snapping the longest winning streak since January 2010. Prices rose 6.3 percent last week to the highest since May 3 and are up 10 percent this year.

Brent oil for April settlement dropped as much as $1.64 to $122.53 a barrel on the ICE Futures Europe exchange in London. Prices have advanced 15 percent this year on concern the west’s dispute with Iran over the Islamic republic’s atomic research may lead to a disruption in exports from the Middle East.

Keystone XL

West Texas Intermediate narrowed its discount to Brent for a second day after TransCanada Corp. said it will proceed with building a $2.3 billion segment of the Keystone XL oil pipeline from Oklahoma to the Texas coast. The link will help relieve a supply bottleneck at the delivery point for WTI crude.

The European benchmark contract’s premium to New York- traded WTI was at $15.44 a barrel. It reached a record of $27.88 on Oct. 14.

“U.S. demand is particularly weak,” Michael McCarthy, a chief market strategist at CMC Markets Asia Pacific Pty, said by telephone today from Sydney. “West Texas and Brent contracts hit technical levels and so we saw some pullback. There’s also concerns broadly in the market that oil prices at these levels will lead to demand destruction.”

New York crude has fallen since Feb. 24, when the 14-day relative strength index for front-month contracts climbed to 76.9, according to data compiled by Bloomberg. A reading above 70 indicates futures have risen too quickly and further gains probably aren’t sustainable. Today’s 14-day RSI was at about 70.

Indian Rupees

Brent, the benchmark for more than half the world’s crude, is also approaching an all-time high in Indian rupees and Brazilian reals. There may be no demand growth for oil this year as prices at current levels curb use in economies that are already slowing, Hussein Allidina, head of commodities research at Morgan Stanley in New York, said by telephone yesterday.

U.S. crude inventories probably rose 1.1 million barrels in the period ended Feb. 24, according to the median of eight analyst estimates in the Bloomberg News survey. Gasoline stockpiles probably increased 250,000 barrels while distillate supplies, a category that includes diesel and heating oil, may have declined 500,000 barrels, the survey showed.

The industry-funded American Petroleum Institute will release its inventory data today. The API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the DOE for its weekly survey.

To contact the reporter 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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