West Texas Intermediate crude dropped the most in almost 14 months as an improving U.S. economy added to speculation that the Federal Reserve will further curb stimulus.
Futures declined 3 percent after U.S. jobless claims fell and manufacturing expanded. The Fed is watching those areas as it decides how quickly to reduce bond purchases meant to boost economic growth. Oil also fell as the dollar gained against the euro and equities slipped from record highs.
“The outlook for further tapering is the primary reason for today’s move,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The market seems to have already priced in the improving economic picture and increasing fuel demand.”
WTI for February delivery fell $2.98 to settle at $95.44 a barrel on the New York Mercantile Exchange. That’s the biggest drop since Nov. 7, 2012. The contract closed at the lowest level since Dec. 2. The volume of all contracts traded was 0.9 percent lower than the 100-day average. The U.S. benchmark crude climbed 7.2 percent last year.
Brent for February settlement dropped $3.02, or 2.7 percent, to end the session at $107.78 a barrel on the London-based ICE Futures Europe exchange. It was the biggest decline since June 20. Volume was 17 percent below the 100-day average. The European benchmark closed at a $12.34 premium to WTI, narrowing the gap by 4 cents.
The dollar rose after the Labor Department reported that jobless claims fell by 2,000 to 339,000 last week, less than the median forecast of 344,000 by 26 economists surveyed by Bloomberg. The Bloomberg Dollar Index reached a three-month high of 1,029.67. A stronger U.S. currency makes dollar-denominated commodities less appealing as an investment.
Manufacturing in the U.S. expanded in December at the second-fastest pace in more than two years. The Institute for Supply Management’s factory index eased to 57, from the prior month’s 57.3, which was the highest since April 2011, the Tempe, Arizona-based group’s report showed today.
Markets also slipped on data from yesterday showing that China’s official Purchasing Managers’ Index slipped to a four-month low in December. A private report today also signaled manufacturing grew at a slower pace.
“We’re looking at macro issues, not the fundamentals of the oil market,” said Tom Finlon, the Jupiter, Florida-based director of Energy Analytics Group LLC. “The dollar is rising and stocks are down. Everything seems to be moving in tandem.”
The Energy Information Administration is predicted to report that crude stockpiles decreased by 2.83 million barrels to 364.7 million last week, according to the median of eight analyst responses in a Bloomberg survey. The release is scheduled for 11 a.m. tomorrow in Washington.
The EIA data will probably show gasoline stockpiles rose 1.38 million barrels to 221.2 million, the survey showed. Inventories of distillate fuel, a category that includes diesel and heating oil, advanced 750,000 barrels to 114.9 million.
“It looks like bulls held it up through year-end on technical strength, but now the underlying fundamentals are reasserting themselves,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.
Brent slipped as Libya prepared to boost output. Workers at the 300,000-barrel-a-day Al Sharara site are waiting for the government to restart operations, Muftah Lamin, a spokesman for protesters at the site, said by phone today from the nearby city of Ubari. The action that shut down the plant will resume if their requests, which include services for the city, aren’t met within two weeks, Lamin said.
“Sentiment is very bearish on the resumption of Libyan supplies and Chinese data missing expectations,” said Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a research company in London.
Libyan output was unchanged at 210,000 barrels a day in December, the lowest level since September 2011, a Bloomberg survey showed. Production averaged 1.28 million in the first six months of this year before tumbling. More than two years after the war that swept the late Muammar Qaddafi from power, efforts to bolster the oil industry are being stymied by feuding militias and protests.
“There’s a greater potential for resolution of the issues that have weighed on Libyan oil production,” said John Kilduff, partner at Again Capital LLC a New York-based hedge fund that focuses on energy. “The country was a bright spot after Qaddafi’s overthrow, but things soon unraveled. If this deal works, it could provide a template for solving other disputes.”
The U.S., U.K., France, Germany, Russia and China agreed on Nov. 24 to ease measures targeting Iran’s crude exports. The interim deal allows for the release of $4.2 billion in frozen oil assets and will also permit Iran to export crude at current levels, rather than forcing continued buyer reductions over the next six months under existing law.
“The outlook for the oil market over the next couple of weeks, through the end of the month, is poor,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “We could see further progress with Iran and reconciliation in Libya, which would increase supply.”
Implied volatility for at-the-money WTI options expiring in February was 19.3 percent, up from 16.2 percent on Dec. 31, data compiled by Bloomberg showed.
Electronic trading volume on the Nymex was 480,581 contracts at 2:55 p.m. It totaled 264,754 contracts Dec. 31, 50 percent below the three-month average. Open interest was 1.62 million contracts.
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