Oil Falls on Chinese Inflation Data

Oil dropped as accelerating Chinese inflation bolstered concern that economic stimulus may be curbed. The spread between crude in New York and London narrowed to the least in almost four months.

Futures fell 0.3 percent after the Chinese government said prices rose the most in seven months. The discount of West Texas Intermediate oil traded in New York to London’s Brent shrank after Enterprise Products Partners LP (EPD) and Enbridge Inc. (ENB) completed the Seaway pipeline expansion, providing an outlet for record supplies in the central U.S.

“If Chinese inflation is accelerating, there may be less room for stimulus, which would cool demand for oil in China,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “There should be plenty of oil heading to the Gulf Coast. We should see the spread continue to come in rather quickly.”

Crude oil for February delivery fell 26 cents to $93.56 a barrel on the New York Mercantile Exchange. Trading volume was 12 percent above the 100-day average. Futures rose 0.5 percent this week, the fifth weekly gain in a row. Prices settled at $93.82 yesterday, the highest level since Sept. 18.

Brent oil for February settlement declined $1.25, or 1.1 percent, to $110.64 a barrel on the London-based ICE Futures Europe exchange. Volume was 35 percent above the 100-day average. The grade dropped 0.6 percent this week.

Premium Shrinks

The Chinese consumer price index rose 2.5 percent in December from a year earlier, the National Bureau of Statistics said today in Beijing. That compares with the 2.3 percent median estimate in a Bloomberg survey of 42 economists and a 2 percent gain in November.

“We’re probably seeing an overreaction to the Chinese data,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It looks like the rise in inflation was due to cold weather. Once winter is over, prices should ease.”

China, the largest oil-consuming country after the U.S., accounted for 11 percent of global demand in 2011, according to BP Plc (BP/)’s Statistical Review of World Energy.

The European benchmark’s premium to West Texas Intermediate shrank to $17.08 a barrel, the narrowest gap since Sept. 19, as service resumed on the Seaway pipeline, which can now carry 400,000 barrels a day from Cushing, Oklahoma, to the Gulf Coast. Brent’s premium was $25.53 on Nov. 15.

“I wouldn’t be surprised if it dropped to $10 or less in the next couple months,” Armstrong said.

Increasing Capacity

Supplies in Padd 2, which includes the Midwest and Cushing, climbed to a record 115.1 million barrels last week, the U.S. Energy Information Administration said Jan. 9. Stockpiles at Cushing, the delivery point for WTI, rose 332,000 barrels to a record 50.1 million in the week ended Jan. 4, according to the EIA, the Energy Department’s statistical arm.

“The WTI-Brent spread should narrow a bit more in the next six weeks or so as Cushing stockpiles start to decline,” said Mike Wittner, head of oil-market research for the Americas at Societe Generale in New York.

U.S. crude output climbed 0.2 percent to 7 million barrels a day last week, the highest level since 1993, the EIA said Jan. 9. Production has increased 17 of the last 18 weeks. The nation will pump 7.92 million barrels a day in 2014, the agency said Jan. 8 in the monthly Short-Term Energy Outlook.

TransCanada Corp. (TRP) expects to pump 700,000 barrels a day to the Houston area from Cushing by mid- to late 2013 on the southern leg of its Keystone XL pipeline, which began construction last summer.

‘Important Step’

“Production is rising at about 1 million barrels a day this year,” Wittner said. “Seaway is an important step but on its own won’t relieve the glut at Cushing. The opening of Keystone later this year will add 700,000 barrels a day of capacity and should have a major impact.”

Gasoline and heating oil, which have moved with Brent more closely than with WTI for the past year, plunged today. Gasoline for February delivery tumbled 5.38 cents, or 1.9 percent, to $2.7395 a gallon in New York, the lowest settlement since Dec. 21. February heating oil decreased 4.58 cents, or 1.5 percent, to close at $3.0085 a gallon.

The Standard & Poor’s GSCI Index of 24 raw materials dropped as much as 1.3 percent, led by declines in gasoline, silver and heating oil.

Electronic trading volume on the Nymex was 468,542 contracts as of 2:36 p.m. Volume totaled 732,744 contracts yesterday, the highest level since Nov. 13 and 51 percent above the three-month average. Open interest was 1.48 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 in New York at dstets@bloomberg.net.

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