Oil Drops as Draghi Stops Short of Detailing Bond Plan

Crude fell in New York after European Central Bank President Mario Draghi failed to give details of a plan designed to shore up the euro by curbing rising government borrowing costs in the region.

Futures tumbled 2 percent after Draghi signaled that the ECB will join forces with governments to buy sovereign bonds in sufficient quantities to remove all doubts about the future of the euro. Draghi said last week he would do whatever it takes to protect the currency, stoking speculation he would outline plans following a central bank meeting today.

“Draghi said the ECB will do whatever it takes and this kind of statement created the anticipations for the central bank to buy bonds,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy. “By creating the expectations and failing to deliver, you obviously get the market reaction that you have today.”

Oil for September delivery fell $1.78 to settle at $87.13 a barrel on the New York Mercantile Exchange. Prices have declined 12 percent this year.

Brent crude for September settlement slipped 6 cents to end the session at $105.90 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract settled at a premium of $18.77 to New York-traded West Texas Intermediate, the steepest since May.

The 27 members of the European Union accounted for 16 percent of global oil demadn in 2011, according to BP Plc’s Statistical Review of World Energy, released in June.

Bond Purchases

ECB bond purchases would probably focus on shorter-term maturities, would be conducted in a way to soothe investors’ concerns about seniority, and wouldn’t breach EU rules prohibiting the financing of government deficits, Draghi told reporters in Frankfurt.

ECB officials are working on the plan and details will be fleshed out in coming weeks, he said. The central bank earlier kept the benchmark interest rate on hold at 0.75 percent.

“The euro is irreversible,” Draghi said at the Frankfurt press conference. The euro-area economy will “recover only very gradually” and growth momentum will be “further dampened by a number of factors,” he said.

The euro declined after Draghi’s comments. The 17-nation currency dropped as much as 0.7 percent against the dollar to $1.2134. A weaker euro and stronger dollar decrease oil’s appeal as an investment alternative.

Financial markets and politicians had ratcheted up pressure on the ECB to act after Draghi pledged last week to save the euro. Oil climbed 3.6 percent in July, the biggest monthly gain since February.

Dollar Focus

“The ECB didn’t come out and say what people wanted to hear,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “The focus is back to the U.S. dollar.”

The Federal Reserve’s Federal Open Market Committee yesterday refrained from announcing stimulus measures to boost economic growth.

“The Fed is not acting and the ECB is not acting either,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We probably have a recession coming globally but the market didn’t get what it wants from the central banks, and that’s why we are under pressure.”

A Labor Department report tomorrow may show that the pace of hiring in July failed to reduce the U.S. jobless rate, according to economists polled by Bloomberg. Unemployment is projected to hold at 8.2 percent. A payroll increase of 100,000 workers would follow an 80,000 gain in June, according to the survey.

Fed Decisions

“For oil, as a risky asset, the more important central bank decisions are those that the Fed is going to take, and these are clearly going to be hinging on the direction of the payroll report tomorrow,” Tchilinguirian said.

Oil also fell as orders placed with U.S. factories unexpectedly declined in June. Bookings decreased 0.5 percent, the Commerce Department said today in Washington. The median forecast of economists in a Bloomberg survey called for a 0.5 percent gain.

The U.S. was the biggest crude-consuming country last year, responsible for 21 percent of global demand, the BP statistical review showed.

U.S. oil demand averaged over four weeks slipped 0.6 percent in the period through July 27 to 18.8 million barrels a day, the Energy Department reported yesterday. U.S. fuel consumption is forecast to drop 0.8 percent this year to 18.7 million barrels a day, according to the department’s monthly Short-Term Energy Outlook on July 10.

Jobs Report

Crude prices briefly gained after a Labor Department report today showed the number of Americans filing applications for unemployment benefits rose less than forecast last week.

Jobless claims climbed by 8,000 to 365,000 in the week ended July 28, the department reported. The median forecast of 47 economists surveyed by Bloomberg called for an increase to 370,000.

Electronic trading volume on the Nymex was 541,870 contracts as of 4:13 p.m. in New York. Volume totaled 540,299 contracts yesterday, 3.5 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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