Oil capped the biggest monthly drop in more than three years on speculation that slowing U.S. growth and Europe’s debt crisis will reduce fuel demand.
Futures decreased 1.5 percent after more Americans applied for jobless benefits and the nation’s gross domestic product expanded more slowly than estimated. Fitch Ratings downgraded eight Spanish regions’ credit, stoking concern the crisis will force lenders to bail out of the country. A government report showed U.S. crude supplies rose to a 22-year high.
“The markets are clearly being driven by economic fear,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “The data here show that economic growth is slowing and the situation in Europe continues to worsen. The economic headwinds are very strong.”
Crude for July delivery declined $1.29 to $86.53 a barrel on the New York Mercantile Exchange, the lowest settlement since Oct. 20. Futures tumbled 17 percent this month, the biggest decrease since December 2008, and are down 12 percent this year.
Brent oil for July settlement fell $1.60, or 1.5 percent, to end the session at $101.87 a barrel on the London-based ICE Futures Europe exchange. It was the lowest settlement since Oct. 4. Prices dropped 15 percent this month, the most since December 2008.
First-time claims for jobless benefits climbed by 10,000 to a one-month high of 383,000 last week, the Labor Department said today. Figures from Roseland, New Jersey-based ADP showed payrolls rose by 133,000 in May, less than the 150,000 advance forecast in a Bloomberg survey.
GDP grew at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed today in Washington.
Business activity in the U.S. expanded at the slowest pace in more than two years in May. The Institute for Supply Management-Chicago Inc. said today its barometer decreased to 52.7, the lowest level since September 2009, from 56.2 in April. Readings greater than 50 signal growth.
“The unemployment number, the ADP report and the GDP data all combine to create a negative picture for all the markets,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Watching Europe go off the rails again this month has been damaging to both confidence and demand.”
Investors are concerned that Spain, the euro area’s fourth-largest economy, may need a bailout as a deepening recession hampers efforts to reduce its budget deficit, which was 8.9 percent of output last year. Spanish 10-year borrowing costs are nearing the 7 percent level that led Greece, Ireland and Portugal to seek aid. The debt crisis has cut economic growth and fuel consumption.
Futures rebounded from the day’s lows after a Greek opinion poll showed support for the largest pro-bailout party before the June 17 election and on a Wall Street Journal report indicating that the International Monetary Fund has started discussing contingency plans for a rescue of Spain.
The IMF is not preparing financial aid for Spain, nor has the country asked for a loan, Gerry Rice, the fund’s director of external relations, told reporters in Washington today.
“The consensus view is that economic growth is slowing globally, which is going to have an impact on demand,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “Rising supplies wouldn’t matter if demand was expected to increase.”
Inventories of crude oil rose 2.21 million barrels last week to 384.7 million, the highest level since July 1990, the Energy Department report showed. It was the 10th consecutive gain, the longest stretch since early 2010. Supplies were forecast to grow 1 million barrels, according to the median of 11 analyst responses in a Bloomberg survey.
Total fuel consumption declined 1.9 percent to 18.3 million barrels a day, the lowest level since March. Demand was down 4.3 percent from a year earlier.
“The trend is definitely down,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in Chicago. “My next target is last summer’s low of $75.71. We’re oversupplied and the European situation continues to weigh on the market.”
The Energy Department published the supply report a day later than usual this week because of the Memorial Day holiday on May 28.
Oil output by the Organization of Petroleum Exporting Countries rose in May to the highest level since 2008 as Saudi Arabia pumped crude at the fastest pace in at least 23 years, a Bloomberg survey showed. The group’s production advanced 20,000 barrels to an average 31.595 million barrels a day, according to the survey of oil companies, producers and analysts.
“OPEC production continues to rise and that’s being reflected in rising inventories,” Kilduff said.
Electronic trading volume on the Nymex was 595,135 contracts as of 4:10 p.m. Volume totaled 548,771 contracts yesterday, 1.7 percent below the three-month average. Open interest was 1.44 million.
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