Oil Drops on Speculation EU May Have to Bail Out More Members

Oil dropped from the highest price in two weeks amid concern that the European Union may have to bail out more member states after Ireland agreed to a rescue package from the EU and the International Monetary Fund.

Futures fell as much as 1 percent as the euro weakened against the dollar. The cost of insuring against default on Portuguese and Spanish debt climbed to records yesterday after Ireland secured financial aid this weekend. Oil also retreated on speculation that measures to slow China’s economy will damp crude demand in the world’s largest energy user.

“I’m surprised that oil hasn’t fallen further, because the euro is so low against the dollar,” said Gerrit Zambo, a trader at Bayerische Landesbank in Munich. “People are afraid that the EU will next have to rescue Portugal, Spain, and further on Italy, so the debt situation of these countries is critical.”

January futures fell as much as 85 cents to $84.88 a barrel in electronic trading on the New York Mercantile Exchange. The contract was at $85.08 at 1:07 p.m. London time. Prices are up 4.5 percent this month. Brent for January settlement fell as much as 74 cents, or 0.9 percent, to $86.60 a barrel on the ICE Futures Europe exchange in London.

Crude, which is headed for a third monthly gain, climbed 2.4 percent yesterday to $85.73, the highest settlement since Nov. 11, after a report showed U.S. shoppers increased purchases ahead of the Christmas holiday, raising expectations of climbing fuel demand as the economy improves.

Stronger Dollar

Prices dropped today as the dollar reached a 10-week high against the euro on concern Ireland’s banking crisis will spread to Spain and Portugal. A rising U.S. currency damps investor demand for commodities.

Spanish bonds fell yesterday by the most since the start of the euro era as a bailout for Ireland failed to assuage speculation that the debt crisis will spread. The cost of insuring the debt of Italy, Spain, Portugal and Ireland surged to records and the euro fell.

Rising fuel demand from emerging economies prompted Societe Generale SA, France’s second-biggest bank, to increase its forecast for benchmark oil prices next year. London’s benchmark Brent crude will average $93.10 a barrel next year, up from the previous forecast of $85, according to a report by the company’s commodities research team.

U.S. Inventories

Supplies of distillates, which include heating oil and diesel, probably fell for a 10th time last week as demand increased, a Bloomberg News survey showed. Stockpiles dropped 1.1 million barrels in the seven days ended Nov. 26, according to the median of 11 analyst estimates before an Energy Department report tomorrow. The industry-funded American Petroleum Institute publishes its weekly report today.

Crude supplies probably decreased 900,000 barrels from 358.6 million, the analysts said. Gasoline inventories probably climbed 750,000 barrels, the survey showed.

Hedge funds and other speculators reduced their bets on rising oil prices, government data released yesterday showed.

Net-long positions in oil dropped by 38,654 futures and options combined, or 22 percent, to 139,743 the week ended Nov. 23, said the Commodity Futures Trading Commission’s weekly Commitments of Traders report.

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