Crude Falls as Fed Minutes Show Support for Tapering

West Texas Intermediate crude dropped to the lowest level in almost two weeks after minutes of the Federal Reserve’s July policy meeting signaled a likely reduction in economic stimulus this year.

Futures fell 1.2 percent. The record of the July 30-31 session showed members of the Federal Open Market Committee were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start curbing bond buying later this year if the economy improves. A few said tapering might be needed soon. A government report showed today that U.S. crude supplies fell by 1.43 million barrels. The spread between WTI and Brent crude traded in London widened to near $6 for the first time since June.

“The FOMC minutes hammer home that a tapering of stimulus is coming soon,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “The likely reduction in bond purchases is very bearish.”

WTI crude for October delivery slid $1.26 to $103.85 a barrel on the New York Mercantile Exchange. It was the lowest settlement since Aug. 8. The volume of all futures traded was 5.7 percent below the 100-day average at 4:03 p.m.

Brent for October settlement dropped 34 cents, or 0.3 percent, to end the session at $109.81 a barrel on the London-based ICE Futures Europe exchange. Trading of futures was 11 percent below the 100-day average. The European benchmark crude closed at a $5.96 premium to WTI, the widest since June 26.

Fed Minutes

Speculation about the Fed’s $85 billion in monthly bond purchases has whipsawed the markets since May, when Bernanke first indicated that policy makers might begin reducing the stimulus this year if the job market continues to improve.

“The Fed comments are casting a shadow on most of the commodity space, including oil,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “The market is down on expectations that some kind of tapering is coming.”

WTI’s 2 percent slump yesterday was driven by reports that the Seaway pipeline, which carries crude from Cushing, Oklahoma, the delivery point for the U.S. benchmark grade, to refineries on the Gulf Coast, was shut, according to Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois-based consulting company.

Seaway Pipeline

Enterprise Products Partners LP (EPD)’s Houston-based spokesman Rick Rainey said today that the 400,000-barrel-a-day pipeline was operating normally. Genscape Inc., a Louisville, Kentucky-based energy information company, said today that Seaway was “essentially shut” for more than 12 hours yesterday after decreased power demand was observed at all pumping stations.

The Hawthorn crude oil pipeline connecting a rail terminal in Stroud, Oklahoma, to the Cushing supply depot restarted yesterday after being shut down a year, research firm Genscape reports. The link has a 90,000 barrel-a-day capacity.

Crude stockpiles at Cushing dropped 1.09 million barrels to 37.4 million last week, the least since March 2012, according to the Energy Information Administration, the Energy Department’s statistical unit. Supplies reached a record 51.9 million barrels in the week ended Jan. 11.

Crude stockpiles slid to 359.1 million on Aug. 16, the lowest level since the week ended Aug. 31, 2012. The decline left supplies 0.5 percent lower than a year earlier, according to the EIA. Inventories surged to 397.6 million on May 24, the most since 1931.

“Crude inventories have declined a great deal this summer but remain at relatively healthy levels,” said Adam Wise, who helps manage a $6 billion oil and gas bond portfolio as a managing director at Manulife Asset Management in Boston.

Output Decline

U.S. crude production slipped 0.7 percent to 7.52 million barrels a day from the highest level since 1989 the prior week. Output has surged as the combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations in the central part of the country.

Refineries operated at 91 percent of capacity, up 1.6 percentage points from Aug. 9, the report showed. It was the first gain in utilization in five weeks.

Gasoline stockpiles slid 4.03 million barrels to 218.4 million, the biggest decline since April 2012, according to the EIA. Inventories of distillate fuel, a category that includes heating oil and diesel, rose 871,000 barrels to 129.4 million, the highest level since February.

Libya prepared to open two oil ports. Zueitina and Hariga are ready to resume exports, the Oil Ministry said yesterday. The country pumped 800,000 barrels a day of crude last month, half the rate a year earlier, according to a Bloomberg survey.

Brent Strength

Brent fell less than WTI because of unrest in Egypt, said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.6 billion. Former President Hosni Mubarak, who was ousted in 2011, was ordered released from jail today, while authorities arrested more Islamists as a crackdown on them widened.

“As long as the situation in Egypt is unsettled, Brent will be stronger than WTI,” O’Grady said.

Egypt controls the Suez Canal and the Suez-Mediterranean Pipeline, through which a combined 4.51 million barrels a day of crude and refined products were shipped last year, the EIA said.

Implied volatility for at-the-money WTI options expiring in October was 22.8 percent, up from 22.2 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 541,789 contracts as of 4:03 p.m. It totaled 783,613 contracts yesterday, 21 percent above the three-month average. Open interest was 1.84 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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