Brent Falls to Four-Month Low as Euro Falls on ECB Cut

Brent crude dropped to the lowest level in more than four months as the euro tumbled against the dollar after the European Central Bank unexpectedly cut its benchmark rate to a record low.

The North Sea oil slipped 1.7 percent while West Texas Intermediate crude declined 0.6 percent. ECB President Mario Draghi pledged to keep borrowing costs low for an “extended period” in comments in Frankfurt. The euro fell the most against the U.S. currency in two years, reducing the appeal of dollar-denominated raw materials as an investment. The slide accelerated after the American economy grew more than forecast, bolstering bets the Federal Reserve may curb stimulus.

“The stronger-than-expected U.S. GDP number and the unexpected ECB rate cut are strengthening the dollar,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “A stronger dollar is generally associated with weaker commodity prices across the board and we’re seeing oil take a hit today.”

Brent crude for December settlement fell $1.78 to end the session at $103.46 a barrel on the London-based ICE Futures Europe exchange. It was the lowest closing price since July 1. The volume of all futures traded was 52 percent above the 100-day average at 3:57 p.m.

WTI dropped 60 cents to settle at $94.20 a barrel on the New York Mercantile Exchange. Volume was 11 percent lower than the 100-day average. The U.S. benchmark grade traded at a $9.26 discount to Brent, the narrowest at settlement since Oct. 25.

Market Contango

Both Brent and WTI are in contango, a situation in which front-month futures are cheaper than the second month, amid diverging views as to whether this pattern will be sustained into 2014.

“The surprising ECB rate cut has sent Brent plunging, and WTI should follow,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “The dollar is screaming higher and that’s going to hit commodity markets.”

The euro slid as much as 1.6 percent to $1.3296, the lowest level since Sept. 16. The S&P’s GSCI Index of 24 raw materials slid by as much as 0.8 percent to 604.63, the least since June.

The ECB decided to cut its main refinancing rate today by a quarter point to 0.25 percent. Just three of 70 economists surveyed by Bloomberg anticipated the action.

Economic Growth

U.S. gross domestic product rose at a 2.8 percent annualized rate in the third quarter after a 2.5 percent gain the prior three months, a Commerce Department report showed today in Washington. The median forecast of economists surveyed by Bloomberg called for a 2 percent advance.

The Standard & Poor’s 500 Index tumbled 1 percent and the Dow Jones Industrial Average dropped 0.7 percent.

“Equities are also lower, which shows this is a broad-based move away from risk assets,” Evans said.

Price drops in the past week reflect “growing pains” as the market adjusts to higher U.S. shale production, according to Goldman Sachs Group Inc. (GS) U.S. crude output surged to 7.9 million barrels a day as of Oct. 18, the most since 1989, the country’s Energy Information Administration said. The combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supply trapped in shale formations in the central U.S.

“This sharp decline in global oil prices is not the start of a significant shift in the global oil balance,” Jeffrey Currie, the bank’s head of commodities research in New York, said in an e-mailed report. “This adjustment process is likely masking a very gentle tightening in the global balance.”

OPEC Barrels

The Organization of Petroleum Exporting Countries said it underestimated the significance of the North American energy boom as it tripled forecasts for shale oil produced there and predicted a decline in demand for its own crude through to 2018.

The need for OPEC barrels will fall by 1.1 million barrels a day to 29.2 million between 2013 and 2018, the Vienna-based group said today in its annual World Oil Outlook. Oil output from shale formations in the U.S. and Canada is seen climbing to 4.9 million barrels a day in 2018, compared with an estimate of 1.7 million barrels a day in last year’s report.

Elsewhere, the alleged fixing of oil prices is unlikely to sway traders from using Brent crude as a benchmark for transactions in the $5.7 trillion commodity market, according to analysts and brokers from London to Tokyo.

Manipulation Lawsuit

Four longtime traders claimed in a lawsuit that some of the world’s biggest oil companies conspired with energy traders to manipulate spot prices for Brent for more than a decade. The case is one of at least seven U.S. lawsuits alleging price-fixing in the London-based Brent market and comes as global regulators scrutinize financial measures after fining banks about $2.5 billion for distorting other benchmarks.

Implied volatility for at-the-money WTI options expiring in December was 19.6 percent, down from 20.8 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 488,758 contracts as of 3:57 p.m. It totaled 594,883 contracts yesterday, 2.6 percent above the three-month average. Open interest was 1.73 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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