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Oil Falls on ‘More Uncertain’ European Economic Outlook

Oil tumbled the most this year as European Central Bank President Mario Draghi said the euro area’s economic outlook has become “more uncertain.”

Prices fell 2.5 percent as Draghi said the region’s economic forecast is subject to downside risks, though the ECB still expects a gradual recovery this year. The central bank held its benchmark interest rate at a record low of 1 percent. Oil’s loss accelerated after data showed U.S. service industries expanded at a slower pace than projected in April.

“There are still a lot of worries about Europe,” said Tom Bentz, a director with BNP Paribas Prime Brokerage Inc. in New York. “Some of the latest comments from the ECB are indicating downside risk but they are not looking to do anything at this time.”

Crude for June delivery fell $2.68 to settle at $102.54 a barrel on the New York Mercantile Exchange, the biggest percentage decline since Dec. 14. Prices have dropped 6.6 percent since closing at a peak of $109.77 a barrel on Feb. 24.

Brent oil for June settlement decreased $2.12, or 1.8 percent, to end the session at $116.08 a barrel on the London- based ICE Futures Europe exchange.

“Remaining tensions in some euro-area sovereign debt markets” are expected to damp growth momentum and inflation will remain above the ECB’s 2 percent limit this year before slowing in 2013, Draghi said at a press conference in Barcelona.

‘Primary Driver’

Austerity measures aimed at stemming the debt crisis have pushed economies from the Netherlands to Spain back into recession. The ECB may be unwilling to add to stimulus as it presses governments to enact reforms and take responsibility for the crisis.

“Europe is still a primary driver and the outlook doesn’t look good there,” said Kyle Cooper, director of commodities research at IAF Advisors in Houston.

The Institute for Supply Management’s non-manufacturing index for the U.S. fell to a four-month low of 53.5 in April from 56 in March, the Tempe, Arizona-based group’s data showed today. The median forecast of 74 economists surveyed by Bloomberg News called for a decrease to 55.3. Readings above 50 signal expansion.

A report tomorrow may show the U.S. added 160,000 jobs in April, compared with a gain of 120,000 the previous month, according to the median estimate of economists surveyed by Bloomberg. The jobless rate held at a three-year low of 8.2 percent, the survey showed.

“We continue to see some poor economic numbers,” said Stephen Schork, president of the Schork Group in Villanova, Pennsylvania. “You are seeing some money being taken off the table ahead of tomorrow’s jobs report.”

Supply Conditions

The oil market showed “slight loosening” last quarter though it’s too early to be sure that supply conditions have improved, according to the International Energy Agency.

U.S. oil supplies rose to a 21-year high last week, the Energy Department reported yesterday. Inventories climbed 2.84 million barrels to 375.9 million, the most since September 1990. Domestic output increased 8,000 barrels a day to 6.12 million, the highest level since November 1999.

Total petroleum consumption fell for a third week, dropping 1.1 percent to 18.5 million barrels a day, the report showed.

“It’s all about growth,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “If there is no economic growth, there is no oil demand, and we know supply is still there.”

Raising Margins

CME Group Inc. (CME), the world’s largest futures exchange, is raising futures margins for non-hedged accounts on May 7 to comply with new regulations. Members will be treated as speculators for outright positions, paying a higher margin, the exchange said.

“If large trading houses have long positions, they may pare some of those positions to meet these margin requirements, and that would drop the prices,” Ilczyszyn said.

Bakken oil strengthened to a premium against West Texas Intermediate crude traded on the Nymex after Tesoro Corp. (TSO) said it was ahead of schedule in construction of a receiving terminal for the grade at its Washington refinery.

Bakken oil strengthened $3 to a $1 premium to WTI, according to data compiled by Bloomberg. That’s the first time since December that the grade has traded at a premium.

Electronic trading volume on the Nymex was 630,718 contracts as of 3:27 p.m. in New York. Volume totaled 596,243 contracts yesterday, 4.1 percent below the three-month average. Open interest was 1.6 million.

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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