Oil Falls to a Two-Week Low on U.S. Economic Recovery Concern

Crude oil dropped to a two-week low on speculation that the U.S. economic recovery is slowing, reducing fuel use in the world’s biggest oil-consuming country.

Oil fell 1.2 percent after the Thomson Reuters/University of Michigan preliminary September index of consumer sentiment fell to 66.6 from 68.9 a month earlier. Enbridge Energy Partners LP started its 6A pipeline. The link that sends Canadian oil to refineries in the Midwest shut because of a leak on Sept. 9.

“The consumer sentiment numbers are what’s driving us today,” said Phil Flynn, vice president of research at PFGBest in Chicago. “If the consumer isn’t happy, you aren’t going to see demand pick up.”

Crude oil for October delivery declined 91 cents to $73.66 a barrel on the New York Mercantile Exchange, the lowest settlement since Aug. 31. Futures slipped 3.6 percent this week and are down 7.2 percent this year.

Brent crude oil for November settlement fell 27 cents, or 0.3 percent, to end the session at $78.21 a barrel on the London-based ICE Futures Europe exchange.

Economists forecast the consumer sentiment measure would rise to 70, according to the median of 65 estimates in a Bloomberg News survey.

“The market really started to tank once the consumer confidence numbers came out,” said Kyle Cooper, a managing director at energy consultant IAF Advisors in Houston. “The economy is the driver of this market right now.”

Fuel Demand

U.S. gasoline consumption in August averaged 9.23 million barrels a day, down from 9.3 million in August 2009, the American Petroleum Institute said today in a report. Demand averaged 9 million barrels a day during the first eight months of 2010, down 0.2 percent from the same period a year earlier.

“I expected that gasoline demand would be stronger by now,” John Felmy, chief economist with the Washington-based API, said in a telephone interview. “We saw some signs of improvement earlier this year, but that’s no longer the case. The overall economy isn’t that robust and that’s being reflected in driving behavior.”

Oil futures topped $78 a barrel this week following the closure of Enbridge’s 466-mile Line 6A. The pipe spilled about 6,100 barrels from a section in Romeoville, Illinois, about 30 miles southwest of Chicago. The 34-inch line runs from Superior, Wisconsin, to Griffith, Indiana, and can carry 670,000 barrels a day of crude, equal to more than one-third of Midwest imports.

Enbridge Pipeline

“The planned restart of the Enbridge pipeline is helping take the heat out of the oil market,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Worries that 6A would be offline a long time like the other Enbridge pipeline were responsible for the rally earlier this week.”

Enbridge shut its 190,000-barrel-a-day Line 6B in Michigan on July 26 and won’t be able to return the line to service until it meets requirements that form part of a “corrective action” order from the Pipeline and Hazardous Materials Safety Administration.

The spread between the front-month crude contract and those for delivery at later dates widened after the Enbridge pipeline opened. October oil traded at a $1.26 discount to November futures, the widest divergence since Sept. 9. The spread, or contango, between the October and December contracts is $3.01.

“The restart of the Enbridge pipeline and the reduction in refinery operating rates is putting downward pressure on the front-month oil contract,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “The primary issue is that we have more supply than demand.”

Operating Rates

U.S. refineries operated at 87.6 percent of capacity last week, down 0.7 percentage point from the prior week, an Energy Department report showed on Sept. 15.

“The oil price will remain stuck in a $70 to $80 range,” said Tobias Merath, head of commodity research at Credit Suisse Group AG in Zurich. “At first it looked like the Enbridge repairs would take a long time.”

Oil in New York climbed to a one-month high on Sept. 13 and failed to settle above the 200-day moving average, a technical indicator that prices would fall, said Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania.

The inability to break through the average “triggered a lot of short-covering,” Schork said.

Oil also dropped after the dollar gained against the euro, reducing the appeal of commodities as an alternative investment. The U.S. currency climbed 0.3 percent to $1.3045 against the euro, the first increase in five days.

Credit Suisse Group AG lowered its forecasts for 2011’s New York crude oil prices to an average $72.50 a barrel, down from an earlier estimate of $80, according to a report by analysts including Edward Westlake.

Oil volume on the Nymex was 636,632 contracts as of 3:21 p.m. in New York. Volume totaled 743,729 contracts yesterday, 17 percent above the average of the past three months. Open interest was 1.35 million contracts.

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