Crude Drops Third Day This Week on U.S. Shutdown

West Texas Intermediate fell for a third day this week on concern that a protracted U.S. government shutdown will slow economic growth and reduce fuel demand.

Prices dropped from a two-week high as the first face-to-face talks between President Barack Obama and congressional leaders failed to break the budget logjam yesterday. WTI also declined as U.S. service industries expanded in September at a slower pace than forecast, the Institute for Supply Management’s non-manufacturing index showed.

“What’s dominating the minds of traders is the government shutdown,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It could have an effect on the economy and oil demand. The ISM number is weak.”

WTI for November delivery slid 79 cents, or 0.8 percent, to settle at $103.31 a barrel on the New York Mercantile Exchange. Prices extended losses after the close, touching $102.88. The volume of all futures traded was 8.3 percent below the 100-day average at 3:29 p.m. The futures have gained 13 percent in 2013.

Brent for November settlement decreased 19 cents to $109 a barrel on the London-based ICE Futures Europe exchange. Volume was 4.8 percent below the 100-day average. The European benchmark’s premium over WTI widened to $5.69 from $5.09 yesterday.

Government Meeting

The Oval Office meeting between Obama and congressional leaders ended with both sides reiterating their positions and the points they’ve been making for days, raising the prospect of a prolonged standoff over the government shutdown and raising the $16.7 trillion U.S. debt limit.

Mark Zandi of Moody’s Analytics estimates a three- to four-week shutdown would cut U.S. economic growth by 1.4 percentage points in the fourth quarter. Moody’s had projected 3 percent expansion in the fourth quarter without a closure.

Democrats, including Obama, say Republicans must end the shutdown and raise the debt ceiling as a precondition to talks on broader budgetary disputes. Republicans want to use the fiscal deadlines to extract changes in Obama’s health-care law.

“As the shutdown drags on, it will have more of a negative effect on the market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “People are starting to pick their heads up and look down the road to calculate the likelihood of a dead default. That could be a significant market disruption.”

Debt Limit

A government default caused by Congress failing to raise the debt limit could have catastrophic consequences that might last decades, the Treasury Department said in a report today.

Treasury Secretary Jacob J. Lew has said the Treasury projects that it will exhaust its “extraordinary measures” to stay under the debt limit by no later than Oct. 17 and will then have about $30 billion in cash on hand.

The U.S., the world’s biggest oil-consuming country, used a fifth of the world’s oil last year, according to BP Plc (BP/)’s Statistical Review of World Energy.

The ISM’s non-manufacturing index dropped to 54.4 last month from the prior month’s 58.6, the biggest decrease since November 2008, the Tempe, Arizona-based group said today. The gauge, which fell to the lowest level since June, is hovering near the 54.7 average since the end of 2011.

Tropical Storm

Crude rose earlier as Tropical Storm Karen developed in the southwestern Gulf of Mexico. The system, forecast to strengthen to near hurricane levels tomorrow, prompted hurricane and storm watches for the U.S. coastline from Louisiana to Florida. Karen is expected to make landfall as a strong tropical storm near the Alabama-Florida line early Oct. 6, according to the National Hurricane Center.

The Gulf is home to 23 percent of U.S. crude production, 5.6 percent of gas output and more than 45 percent of petroleum refining capacity, according to the Energy Department.

Destin Pipeline Co. evacuated all non-essential personnel yesterday from operations in the central and eastern part of the Gulf, a company notice showed. BP Plc also said it was pulling non-essential workers at four deepwater production platforms. Anadarko Petroleum Corp. (APC) was removing similar employees from four sites and shutting its Neptune platform.

“The storm is supportive for prices,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts.

TransCanada

Crude jumped 2 percent yesterday after TransCanada Corp. (TRP) said it plans to finish work on the southern portion of the Keystone XL pipeline network by the end of October. The 700,000-barrel-a-day pipeline will run to the Texas Gulf Coast from Cushing, Oklahoma, the delivery point for WTI futures.

“You had some overbuying yesterday,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “There is a lot of uncertainty about the shutdown.”

Implied volatility for at-the-money WTI options expiring in November was 19.8 percent, up from 19.4 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 496,254 contracts as of 3:29 p.m. It totaled 773,444 contracts yesterday, 26 percent above the three-month average. Open interest was 1.88 million contracts.

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

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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