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Crude Falls Most in Seven Months on China, Fed Outlook

West Texas Intermediate crude fell the most in seven months on signs China’s economy is slowing and after Federal Reserve Chairman Ben S. Bernanke said the central bank may start curbing bond purchases later this year.

Futures slid 2.9 percent as reports showed that Chinese manufacturing shrank at a faster pace than the previous month and the country’s benchmark money-market rate rose to a record. Bernanke said yesterday that the Fed may begin reducing the purchases that have fueled gains in global markets and end the program in 2014, should risks to the economy abate. WTI’s discount to Brent oil in London shrank to the least since 2011.

“Chinese manufacturing is clearly in a downtrend and the cash crunch is getting worse,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “The initial cause of the rout was Bernanke’s speech yesterday. The reaction shows that commodity-market strength has been based on the idea that central banks would continue to supply liquidity to the market and little else.”

WTI futures for July delivery, which expired today, dropped $2.84 to settle at $95.40 a barrel on the New York Mercantile Exchange, the biggest one-day decline since Nov. 7. The more actively traded August contract was down $3.34 to $95.14. The volume of all futures traded was 46 percent above the 100-day average at 3:04 p.m.

Brent oil for August settlement declined $3.97, or 3.7 percent, to end the session at $102.15 a barrel on the London-based ICE Futures Europe exchange. Volume for all contracts was 11 percent higher than the 100-day average.

The European benchmark grade shrank to a $7.01 premium to WTI based on August contracts, the narrowest spread using closing prices since Jan. 20, 2011.

Preliminary Index

The preliminary June Purchasing Managers’ Index for China, released today by HSBC Holdings Plc and Markit Economics, dropped to 48.3 compared with the 49.1 median forecast in a Bloomberg (INJCJC) survey. The reading will be the lowest since September if confirmed on July 1 in the final reading. May’s gauge of 49.2 was the first below 50 since October, signaling contraction.

China’s seven-day repurchase rate, a gauge of interbank funding availability, rose to the highest since at least 2006. The central bank has refrained from using reverse-repos to inject funds into the interbank market since Feb. 7.

“Over the last few months, the markets have begun to look at China with a jaundiced eye,” said Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania. “The Chinese economic outlook isn’t as rosy and that has investors worried.”

Fed Stimulus

The Federal Open Market Committee left the monthly pace of bond purchases unchanged at $85 billion, though the central bank said that “downside risks to the outlook for the economy and the labor market” have diminished.

The outlook for tapering stimulus sent the dollar surging, the appeal of commodities denominated in the U.S. currency as an investment. The dollar rose as much as 1 percent to $1.3161 against the euro, the highest level since June 6. The Standard & Poor’s GSCI Index of 24 raw materials fell as much as 3.3 percent.

The S&P 500 Index fell 2.5 percent and the Dow Jones Industrial Average declined 2.3 percent.

“The dollar is up on the Bernanke comments and equities are down on them,” Schork said. “The prospect that the Fed will stop force-feeding $85 billion a month to the markets, a lot of which found its way to commodities, has obviously scared a lot of people.”

Jobless Claims

The drop in oil prices accelerated after more Americans than forecast filed applications for unemployment benefits. Jobless claims rose by 18,000 to 354,000 in the week ended June 15, the Labor Department reported today. A 340,000 gain was expected, according to economists surveyed by Bloomberg.

Another report showed the index of U.S. leading indicators rose less than projected in May. The Conference Board’s gauge of the outlook for the next three to six months advanced 0.1 percent, the New York-based group said. A 0.2 percent gain was projected in a Bloomberg survey.

U.S. crude inventories rose 313,000 barrels to 394.1 million last week, the Energy Information Administration said yesterday. Gasoline stockpiles increased 183,000 barrels to 221.7 million, the highest level since April 12.

U.S. Secretary of State John Kerry will meet this weekend with European and Middle Eastern allies to discuss what weapons to send Syrian rebels. The June 22 talks in Doha are expected to include officials from France, the U.K., Italy, Saudi Arabia, Turkey, Qatar, Egypt and Jordan, according to French officials who spoke on the condition that they not be identified.

Middle East

“We won’t be heading to the mid-$80s anytime soon because there is enough geopolitical tension in the Middle East to keep a floor under prices,” Armstrong said.

The Middle East accounted for 33 percent of global crude output in 2012, according to BP Plc (BP/)’s Statistical Review of World Energy. Syrian oil exports, which were never among the highest in the region, have almost completely ended. Syria borders Iraq, the second-biggest producer in the Organization of Petroleum Exporting Countries.

Implied volatility for at-the-money WTI options expiring in August was 23.8 percent, compared with 18.6 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 753,516 contracts as of 3:04 p.m. It totaled 673,450 contracts yesterday, 11 percent above the three-month average. Open interest was 1.85 million contracts.

To contact the reporters 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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