Oil Falls After U.S. Supplies Climb to Most Since 1990

Oil dropped to an eight-month low after the Energy Department reported that U.S. crude inventories climbed to the highest level in 22 years. Brent crude in London tumbled to an 18-month low.

Futures in New York declined 2.7 percent after the department said supplies rose 2.86 million barrels to 387.3 million last week, the highest level since July 1990. The decline accelerated after Federal Reserve policy makers lowered their outlook for growth and employment.

“We are down because inventories were plentiful even before today’s report,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in Chicago. “We will probably take out $80 in the next couple weeks.”

Crude oil for July delivery fell $2.23 to $81.80 a barrel on the New York Mercantile Exchange, the lowest settlement since Oct. 5. Prices are down 17 percent this year. The July contract expired today. The more actively traded August contract dropped $2.90, or 3.4 percent, to $81.45.

Brent oil for August declined $3.07, or 3.2 percent, to $92.69 a barrel on the London-based ICE Futures Europe exchange, the lowest settlement since Dec. 17, 2010.

The increase in stockpiles was the first in three weeks. The median estimate of 11 analysts surveyed by Bloomberg was a decline of 1.3 million barrels.

Surging Output

U.S. crude production climbed 117,000 barrels a day to 6.35 million in the week ended June 15, the highest level since February 1999, the report showed. Crude imports increased 328,000 barrels a day to 9.45 million last week, the highest level since March.

Total fuel demand dropped 4.2 percent to an average 18.6 million barrels a day, the biggest decrease since March. Gasoline and distillate inventories both advanced.

Fed officials lowered their central tendency estimate for U.S. 2012 gross domestic product growth to 1.9 percent to 2.4 percent from 2.4 percent to 2.9 percent in April. They forecast the jobless rate will average 8 percent to 8.2 percent in the fourth quarter of 2012, up from a previous estimate of 7.8 percent to 8 percent.

The Fed said it will expand the Operation Twist stimulus program by $267 billion through the end of the year. In Operation Twist, the central bank sells short-term securities and buys the same amount of longer-term debt to lengthen the average maturity of its holdings and keep borrowing costs low.

“The Fed is in the driver’s seat,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “Hedge funds have been selling futures because they aren’t getting enough liquidity from the Fed.”

Quarterly Decline

Crude in New York has dropped 21 percent in the second quarter as Europe’s financial woes have raised concern about the region’s economic recovery and future energy demand. Brent crude has fallen 25 percent in the quarter.

Spain is scheduled to sell debt tomorrow maturing in 2014, 2015 and 2017. Yields on the nation’s 10-year government debt increased to 7.29 percent on June 18, the highest level since the euro was introduced in 1999. Yields remain above the 7 percent level that pushed Greece, Ireland and Portugal to seek rescue packages.

“Until the situation in Europe stabilizes, the oil market will trend lower,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “How long it will take to shake out is anyone’s guess. There’s no easy fix.”

European Summit

German Chancellor Angela Merkel, French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy will gather June 22 in Rome. The meeting is to help prepare for a June 28-29 European Union summit in Brussels at which leaders will discuss the path to further financial integration, including proposals for closer banking cooperation.

“The Europeans appear to be headed for further economic and financial integration,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.3 billion. “It will take time.”

Merkel declined to commit to directing sovereign debt purchases through the euro-area bailout fund, pushing back on calls by euro-region leaders who backed the measure as a way to ease the crisis. Yesterday, Hollande championed the idea of using the European Stability Mechanism to purchase indebted countries’ bonds as a way to counter rising yields.

Futures climbed 0.4 percent early in the session after Iran and world powers failed to reach a breakthrough after two days of talks in Moscow aimed at alleviating the threat of military action against the second-biggest oil producer in the Organization of Petroleum Exporting Countries.

“All eyes are on Europe and the global economy,” said Fred Rigolini, vice president of Paramount Options Inc. in New York. “I don’t think many people are worried about Iran.”

Electronic trading volume on the Nymex was 708,558 contracts as of 3:23 p.m. in New York. Volume totaled 554,402 contracts yesterday, versus the three-month average of 553,000. Open interest was 1.43 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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June 20 (Bloomberg) -- Bloomberg's Dominic Chu reports that crude oil futures extended declines after the U.S. Energy Department reported an unexpected increase in stockpiles to the highest level in almost 22 years. He speaks on Bloomberg Television's "Market Makers." (Source: Bloomberg)