Oil Falls as Bernanke Says Economy at Risk From Crisis

Oil fell after Federal Reserve Chairman Ben S. Bernanke said the economy is at risk from Europe’s debt crisis and the prospect of fiscal tightening, tempering optimism over a cut in Chinese interest rates.

Futures slipped 0.2 percent as Bernanke refrained in congressional testimony from discussing steps the Fed might take to boost growth. Oil rose more than $2 earlier after the People’s Bank of China said the benchmark one-year deposit rate will drop by 0.25 percentage point starting tomorrow.

“Bernanke is keeping things pretty close to his chest and hasn’t signaled any additional accommodative easing from the U.S.,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “The Chinese rate cut was good news but we need to see more.”

Crude oil for July delivery declined 20 cents to settle at $84.82 a barrel on the New York Mercantile Exchange. It was the first drop since June 1. Futures are down 14 percent this year.

Brent oil for July settlement decreased 71 cents, or 0.7 percent, to end the session at $99.93 a barrel on the London- based ICE Futures Europe exchange.

The drop in New York oil accelerated after the settlement. Crude was down $1.53, or 1.8 percent, at $83.49 at 4:45 p.m. in electronic trading on the Nymex.

“I think we’re seeing an emotional reaction,” Evans said. “There’s a real sense of a letdown after we weren’t able to sustain gains from the Chinese rate cut and we didn’t get anything to lift the market from Bernanke,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

Bernanke’s Warning

Bernanke warned lawmakers that “a severe tightening of fiscal policy at the beginning of next year that is built into current law -- the so-called fiscal cliff -- would, if allowed to occur, pose a significant threat to the recovery.”

Bernanke will lead the Federal Open Market Committee in a policy-setting meeting June 19 and 20 that will confront the slowest employment growth in a year and a worsening debt crisis in Europe. The central bank said yesterday in its Beige Book business survey that the U.S. economy maintained a moderate pace of growth from early April to late May.

Chinese banks can offer a 20 percent discount to the key lending rate, up from a previous 10 percent. Lenders will for the first time be able to offer savers deposit rates that are up to 10 percent higher than the benchmark.

“The initial reaction to the Chinese rate cut seems to have run its course and now we’re returning to all the uncertainty that’s sent prices lower,” Evans said.

Debt Crisis

Oil in New York, which fell 17 percent in May for the biggest monthly drop in more than three years, may rebound if policy makers take steps to contain the European debt crisis and counter weaker economic growth in the U.S. and China, Goldman Sachs said in a report e-mailed today.

Goldman reiterated its call to buy West Texas Intermediate crude futures for September delivery. The recommendation, first made on Feb. 22, has so far generated a “dismal” loss of $22.72 a barrel, David Greely, head of energy research in New York, said.

The pending European Union oil embargo on Iran is another area where government policy will affect the crude market by tightening the amount of supply available, Greely said. The sanctions are set to go into effect on July 1.

The bank forecasts in a worst-case scenario that Iranian exports drop to 1.1 million barrels a day, about 1.3 million barrels less than in 2011, according to the note. Its baseline view is calling for a daily decline to 1.6 million barrels.

Japan’s Cabinet is poised to approve a bill giving sovereign guarantees for the nation’s oil tankers loading Iranian crude, potentially undermining sanctions targeting the Persian Gulf nation’s nuclear program.

Japanese Bill

The government plans to provide as much as $7.6 billion so that ship owners and petroleum refiners can maintain insurance when hauling crude from Iran, according to two government officials with direct knowledge of the law, who declined to be identified before the Cabinet gives consent to the legislation as soon as tomorrow.

The bill will be submitted to the Diet, or national parliament, after the Cabinet endorses it, they said.

A law signed by President Barack Obama on Dec. 31 blocks countries’ access to the U.S. financial system if they can’t show they’re reducing oil imports from Iran. Japan and 10 European nations received exemptions in March for a renewable period of 180 days.

U.S. Supplies

Gasoline stockpiles climbed 3.35 million barrels to 203.5 million in the week ended June 1, according to an Energy Department report yesterday. Demand for the fuel dropped 3.2 percent to 8.65 million barrels a day.

“The fundamentals point to lower prices,” said Kyle Cooper, director of commodities research at IAF Advisors in Houston. “The gasoline build was huge and demand terrible.”

Electronic trading volume on the Nymex was 584,570 contracts as of 4:43 p.m. Volume totaled 647,809 contracts yesterday, 15 percent above the three-month average. Open interest was 1.46 million.

To contact the reporter 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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