Oil Heads for Monthly Drop on Europe Debt Crisis, Economy

Oil was poised for the biggest monthly drop in more than three years in New York on speculation Europe’s worsening debt crisis and a slowing U.S. economy will reduce fuel demand.

Futures traded little changed after losing 3.2 percent yesterday, the most since May 4. Prices fell as the cost of protecting Spanish bonds against default climbed to a record yesterday and a Greek poll showed support for anti-austerity parties before elections. Pending U.S. home sales slid the most in a year in April, according to a report. Oil closed yesterday 20 percent below this year’s highest settlement of $109.77 a barrel, a magnitude commonly defined as a bear market.

“The problem is not only in Greece but several countries in Europe,” said Ken Hasegawa, a commodity derivative sales manager at Newedge Group in Tokyo, who predicts New York crude will decline to $75 a barrel by the third quarter. “Prices have fallen on the pessimistic expectations of the global economic recovery.”

Crude for July delivery was unchanged at $87.82 a barrel in electronic trading on the New York Mercantile Exchange at 3 p.m. Singapore time. The contract slid $2.94 yesterday to $87.82, the lowest settlement since Oct. 21. Prices are down 16 percent this month, the biggest drop since December 2008, and are 11 percent lower this year.

Brent oil for July settlement on the London-based ICE Futures Europe exchange was at $103.43 a barrel, down 4 cents. Prices have dropped 13 percent this month, the most since May 2010. The European benchmark contract’s premium to New York- traded crude narrowed for a third day to $15.62.

‘Demand Destruction’

“We’re seeing demand destruction across the board,” said Jonathan Barratt, chief executive officer of Barratt’s Bulletin, a commodity-markets newsletter in Sydney. “I was looking for a Middle Eastern premium to be built in, but Spain’s concern seems to be overriding that and filtering through the whole commodity complex. People are scared to spend.”

The countries using the euro accounted for about 12 percent of global oil demand in 2010, according to BP Plc (BP/)’s annual Statistical Review of World Energy released in June. The U.S. accounted for about 21 percent.

Oil may extend its decline in New York as the monthly moving average convergence-divergence indicator falls below its signal line, showing a loss of positive momentum, according to data compiled by Bloomberg. Investors tend to sell contracts on a so-called bearish MACD crossover. Futures have short-term technical support along the lower Bollinger Band on the daily chart, around $85.45 a barrel today.

OPEC Production

U.S. crude output rose 90,000 barrels a day to 6.24 million in the week ended May 18, the fastest rate since February 1999, Energy Department data showed last week. Oil production in the Organization of Petroleum Exporting Countries climbed 305,000 barrels to 31.405 million barrels a day in April, the most since October 2008, according to a Bloomberg survey.

“The market is oversupplied by around 500,000 barrels a day,” said Dominic Schnider, the Singapore-based global head of commodity research at UBS AG’s wealth-management unit, who sees New York crude falling to $80 a barrel and Brent to $95. “The speculative interests are still high in oil. That makes it extremely vulnerable to further deterioration.”

So-called long positions in crude, or wagers on rising prices, outnumbered short bets by 136,751 contracts in the week ended May 22 on the Nymex. That’s 12 percent higher than the average in U.S. Commodity Futures Trading Commission data compiled by Bloomberg going back to at least June 2006.

Iran, OPEC’s second-largest producer, faces Western sanctions including an oil embargo starting July 1 aimed at persuading it to stop enriching uranium. The Persian Gulf nation has increased its stockpile of 20 percent medium-enriched uranium by a third since February, the UN’s International Atomic Energy Agency said in a May 25 report.

U.S. Stockpiles

Iran and Western negotiators will hold another round of talks about the country’s nuclear program next month after failing to reach an agreement at a summit in Baghdad last week. The government in Tehran faces four set of United Nations sanctions urging the country to stop enriching uranium.

U.S. oil stockpiles dropped 353,000 barrels to 385.9 million last week, according to the American Petroleum Institute, an industry group in Washington. An Energy Department report today will likely show that supplies climbed 1 million barrels to 383.5 million, the highest since 1990, according to the median estimate of 11 analysts surveyed by Bloomberg News.

Gasoline inventories rose 2.1 million barrels, the API data showed. The Energy Department report will probably show stockpiles slid 1 million barrels, according to the survey. The agency is scheduled to release its report at 11 a.m. 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 Energy Department for its weekly survey.

To contact the reporters on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net; Yee Kai Pin in Singapore at kyee13@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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