Oil Falls on Speculation Fed to Forgo Stimulus

Oil fell for a second day on speculation the Federal Reserve will be less likely to announce additional measures to stimulate the economy after U.S. consumer confidence and business activity unexpectedly grew.

Crude reduced the biggest monthly gain since February as a Bloomberg survey of economists showed the Fed will probably forgo a third round of large-scale asset purchases at a two-day meeting beginning today. Consumer confidence rose for the first time in five months in July and a barometer of business activity increased at a faster pace.

“Some of the hopes for Fed easing have gone out of the market and that’s why you are seeing the selloff,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “A lot of the recent rally was solely built upon monetary easing. With the slightly improved economic data, the Fed might not see the urgency that it did.”

Oil for September delivery fell $1.72, or 1.9 percent, to settle at $88.06 a barrel on the New York Mercantile Exchange. Prices climbed 3.6 percent this month and declined 11 percent this year.

Crude, which touched $87.31 in electronic trading after the settlement, pared losses following an American Petroleum Institute report that oil inventories tumbled 11.6 million barrels last week to 369.7 million, in the biggest one-week decline since Sept. 5, 2008.

September futures dropped $1.91, or 2.1 percent, to $87.87 a barrel at 4:51 p.m. in electronic trading. Prices were at $87.47 before the report was released at 4:30 p.m.

Brent crude for September settlement decreased $1.28, or 1.2 percent, to $104.92 a barrel on the London-based ICE Futures Europe exchange.

U.S. Economy

The Conference Board’s confidence index increased to 65.9 this month from 62.7 in June, figures from the New York-based private research group showed today. Economists projected a reading of 61.5, according to the median estimate in a Bloomberg survey.

Business activity in the U.S. grew at a faster pace in July as the economy weathered a slowdown in hiring and household spending. A barometer from the Institute for Supply Management- Chicago Inc. increased to 53.7 from 52.9 in June. Readings greater than 50 signal growth. A Bloomberg survey projected the purchasing managers’ gauge would decline to 52.5.

Fed’s Options

Fed Chairman Ben S. Bernanke said July 17 that the central bank was studying options for further easing of monetary policy.

“If we don’t get anything from the Fed, we’ll be under pressure,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Oil continues to consolidate around $90, and it’s going to need some fairly significant stimulus measures to trigger another rally.”

Eighty-eight percent of economists in the Bloomberg survey said the Federal Open Market Committee will refrain from starting new purchases. Forty-eight percent say the Fed’s policy-making committee will announce plans to buy $600 billion in housing and government debt at its Sept. 12-13 meeting, according to the July 25-27 survey of 58 economists.

Bernanke said during testimony to the Senate Banking Committee July 17 that easing tools include further purchases of assets, such as mortgage-backed securities, reducing the interest rate that the Fed pays on reserves banks keep with the Fed, and altering its communications on the outlook for interest rates.

The central bank bought a total of $2.3 trillion in bonds from December 2008 to June 2011 to stimulate the economy in two rounds of asset purchases known as quantitative easing.

Equities Drop

Crude followed U.S. stocks lower. The Standard & Poor’s 500 Index slid 0.4 percent.

“Oil is taking its cue from the equity market,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “We have Fed announcement tomorrow and people are not putting on big positions.”

Oil also declined as German Chancellor Angela Merkel’s coalition rejected granting the permanent euro rescue fund access to European Central Bank liquidity via a banking license. France and Italy are building support for such a plan as part of efforts to stem Europe’s debt crisis.

The German Finance Ministry in Berlin said it saw no need for any such move in an e-mailed response to questions.

“We’re down on concerns about Europe,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Prices were elevated on optimism that additional stimulus was on the way. The Germans have thrown a wet blanket on those hopes.”

Inventory Survey

U.S. oil supplies probably fell for the fifth time in six weeks as refinery operations stayed near a five-year high and imports declined, a Bloomberg survey showed. Stockpiles decreased 1 million barrels, or 0.3 percent, to 379.1 million in the seven days ended July 27, according to the median of 12 analyst estimates before an Energy Department report tomorrow.

Electronic trading volume on the Nymex was 478,626 contracts as of 4:51 p.m. in New York. Volume totaled 390,132 contracts yesterday, 30 percent below the three-month average. Open interest was 1.4 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: Bill Banker at bbanker@bloomberg.net

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