Crude Caps Weekly Drop as Investors Weigh Stimulus

West Texas Intermediate crude fell, capping its biggest weekly drop in more than a month, after rising U.S. durable goods orders bolstered concern that the Federal Reserve will scale back stimulus efforts.

Futures slid as bookings for equipment meant to last at least three years rose more than forecast. Fed Chairman Ben S. Bernanke said May 22 that the pace of asset purchases could decrease “in the next few meetings” if the economy improves. Reports this week showed U.S. gasoline supplies surged and Chinese factory output contracted. Goldman Sachs Group Inc. (GS) recommended selling WTI and buying Brent for December 2014 as crude supplies grow on the U.S. Gulf Coast.

“Uncertainty about the future of stimulus is the major factor weighing on markets today,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We’ve been down this week for three reasons: concerns that the Fed will ease off on the stimulus, worries about China’s economy and very high inventories.”

WTI crude for July delivery decreased 10 cents to $94.15 a barrel on the New York Mercantile Exchange, the lowest settlement since May 2. The volume of all contracts traded was 35 percent below the 100-day average at 4:46 p.m. Oil fell 1.9 percent this week, the most since the seven days ended April 19.

There will be no floor trading in New York on May 27 because of the Memorial Day holiday. All electronic transactions will be booked with May 28 trades for settlement.

Brent Futures

Brent oil for July settlement increased 20 cents to end the session at $102.64 a barrel on the ICE Futures Europe exchange. Volume for all contracts was 49 percent lower than the 100-day average. The European benchmark grade traded at a premium of $8.49 to WTI, the most since May 16.

The spread is set to narrow toward $5 a barrel in the third quarter as new pipeline capacity to move crude out of the storage hub in Cushing, Oklahoma, causes stockpiles there to decline “substantially,” Goldman said.

The discount for WTI for delivery in December 2014 against the equivalent Brent contract has narrowed to $8.35 a barrel from $10.11 on April 22. The spread should widen as pipelines carrying crude out of Cushing cause a buildup on the Gulf Coast that lowers the price of WTI versus Brent, Goldman said.

“If an oversupply of light, sweet crude in the U.S. Gulf Coast becomes a problem as soon as third quarter 2013, it should be an even bigger problem in 2014,” analysts Jeffrey Currie and Stefan Wieler in New York said in a report today.

Durable Goods

Oil and equities dropped after the Commerce Department said orders for durable goods increased 3.3 percent last month after dropping 5.9 percent in March. The median forecast from 78 economists surveyed by Bloomberg projected a 1.5 percent gain. The Standard & Poor’s 500 Index declined 0.1 percent.

“The market shrugged off the positive durable goods number,” McGillian said. “Attention is focused on what it may mean for future stimulus.”

U.S. gasoline stockpiles rose by 3.02 million barrels last week, according to an Energy Information Administration report on May 22. The peak-demand summer driving season, when Americans usually take vacations, begins with the May 27 Memorial Day holiday and ends in early September with Labor Day.

“The bulls are fighting the calendar,” said Phil Flynn, a senior market analyst for Price Futures Group in Chicago. “There’s plenty of supply here and once we get through the Memorial Day holiday, any demand concerns will lessen. The Chinese data continues to weigh on the market.”

Ample Stockpiles

Crude supplies slipped 338,000 barrels to 394.6 million last week, the EIA report showed. Stockpiles climbed to 395.5 million in the week ended May 3, the most since 1931, according to the EIA, the Energy Department’s statistical unit.

“U.S. crude stocks are very well filled, and there’s some disappointing economic data from China,” said Hannes Loacker, an analyst at Raiffeisen Bank International AG (RBI) in Vienna, who estimates WTI will average $92 this quarter. “It’s not the best cocktail for crude.”

China’s Purchasing Managers Index was reported at 49.6 for May, the lowest level since October and less than forecast, data released yesterday by HSBC Holdings Plc and Markit Economics showed. Bernanke signaled May 22 that the central bank may reduce the monthly bond buying program known as quantitative easing.

Market Forecast

Twenty of 32 analysts and traders surveyed by Bloomberg this week, or 63 percent, forecast that WTI will decrease through May 31. Seven respondents, or 22 percent, predicted an increase. Five projected no change.

Implied volatility for at-the-money WTI options expiring in July was 20.2 percent, compared with 21.7 yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 339,315 contracts as of 3:47 p.m. It totaled 623,334 contracts yesterday, 7.3 percent above the three-month average. Open interest was 1.74 million contracts.

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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