Oil Drops for Second Day on Saudi Action, FedEx Outlook

Oil declined to a two-week low as Saudi Arabia was said to be taking action to lower prices and after FedEx Corp. (FDX) reduced its profit outlook, increasing concern that an economic slowdown will curb demand.

Oil fell for a second day as a Persian Gulf official said Saudi Arabia is pumping about 10 million barrels a day and will produce more if customers demand it. FedEx, the world’s biggest cargo airline, said customers are turning to cheaper delivery options. Prices tumbled 2.4 percent yesterday, at one point dropping $3 in less than a minute on a surge in volume.

“We know the Saudis are producing more oil for a while and that the overall economy is slowing,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “Clearly when the market broke down like yesterday, participants didn’t look up and say, ‘My god, it went on sale and I’ve got to buy some,’ which is bearish in itself.”

Oil for October delivery slid $1.33, or 1.4 percent, to $95.29 a barrel on the New York Mercantile Exchange, the lowest settlement since Aug. 30. The two-day decline was 3.7 percent. Prices are down 3.6 percent this year.

Prices were little changed after the industry-funded American Petroleum Institute reported oil inventories increased 2.43 million barrels to 361.5 million last week. The October contract fell $1.17, or 1.2 percent, to $95.45 a barrel at 4:34 p.m. in electronic trading. Prices were at $95.46 before the report was released at 4:30 p.m.

Brent crude for November settlement fell $1.76, or 1.5 percent, to $112.03 a barrel on the London-based ICE Futures Europe exchange. It dropped 2.5 percent yesterday.

Selloff Damage

“Part of what we’re seeing today is a result of damage to the charts from yesterday’s selloff,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The FedEx warning speaks to lower energy demand on a number of fronts.”

Current oil prices are not supported by the fundamentals, the Persian Gulf official said, declining to be identified because he’s not authorized to speak publicly. Saudi Arabian Oil Minister Ali al-Naimi said Sept. 10 that global supply, demand and inventories don’t justify current prices.

Output from the kingdom, the world’s largest oil exporter, has boosted supply from the Organization of Petroleum Exporting Countries to 1.63 million barrels a day more than the amount the world needs this year, data from OPEC’s most recent monthly report showed on Sept. 11.

Price Concern

President Barack Obama’s administration “welcomes the Saudi Arabian oil minister’s recent remarks and share his concern about rising oil prices,” Jay Carney, the White House spokesman, said today in Washington.

FedEx’s revised forecast comes after competitor United Parcel Service Inc. (UPS), the world’s largest package-delivery company, pared its full-year profit forecast in July. FedEx is an economic bellwether because of the variety of goods it ships.

Oil also declined as European leaders struggled to resolve the debt crisis. Spain’s Deputy Prime Minister Soraya Saenz de Santamaria said the country will consider a bailout.

“We are having a little follow-through after yesterday’s big drop,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “There are some potential bearish developments out there. Concern about Spain asking for a bailout is making the market nervous.”

The euro slipped as much as 0.7 percent against the dollar to $1.303. A weaker euro and stronger dollar reduce oil’s appeal as an investment alternative.

Oil settled at a four-month high on Sept. 14 as the Federal Reserve said it will buy mortgage securities in a third round of quantitative easing.

‘Algorithm Trade’

“The market is falling because people are coming to the realization that QE3 may not be that effective,” said Tom Pawlicki, director of market research at Chicago-based EOXLive and previously an analyst at MF Global. “An algorithm type of trade may have been initiated yesterday because most commodities were down across the board.”

The Fed purchased a total of $2.3 trillion in bonds from December 2008 to June 2011 in the first two rounds of asset purchases.

“The oil market can’t live off the momentum of monetary stimulus like some other commodity market,” Kilduff said. “There has to be some demand.”

Total petroleum demand in the U.S. slumped to 18 million barrels a day in the week ended Sept. 7, the lowest level since March 16, the Energy Department reported last week.

U.S. Inventories

Prices also fell as the Energy Department may report tomorrow that U.S. crude stockpiles rose a second week, according to a Bloomberg survey of analysts. Inventories probably climbed 1 million barrels last week, according to the median estimate of nine analysts.

Electronic trading volume on the Nymex was 492,555 contracts as of 4:35 p.m. Volume totaled 719,538 contracts yesterday, 34 percent above the three-month average. Open interest was 1.61 million.

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net

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