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Crude Drops on Concern Over Greek Bailout Talks, U.S. Economy

May 16 (Bloomberg) -- Oil dropped for the first day in three before Greece asks for more aid from the European Union and on speculation the U.S. recovery is slowing, curbing fuel demand in the world’s biggest crude-consuming nation.

Futures slipped as much as 1.5 percent before European governments and the International Monetary Fund debate increasing Greece’s 110-billion euro ($115 billion) bailout. In the U.S., Federal Reserve Bank of Atlanta President Dennis Lockhart said stimulus measures will end only when the recovery is “more clearly sustainable.”

“We have a lot of uncertainty over the extension of aid to Greece,” Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch, said in a Bloomberg Television interview in Hong Kong. “When you put all the factors together, that doesn’t paint a very rosy picture for the market in the second half of the year.”

Oil for June delivery slid as much as $1.52 to $98.13 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.37 at 2:51 p.m. Singapore time. The contract gained 2.5 percent last week, the most since the period ending April 8. Prices are 40 percent higher the past year.

Brent for June settlement lost 92 cents, or 0.8 percent, to $112.91 a barrel on the London-based ICE Futures Europe exchange. The contract advanced 4.3 percent last week.

Strauss-Kahn Arrest

The European Union and the IMF meet in Brussels today. Donor countries, led by Germany, are demanding deeper budget cuts in exchange for granting Greece extra aid or giving it more time to pay back official loans, and are weighing whether to make bondholders share the costs. The talks are clouded by the May 14 arrest of IMF Managing Director Dominique Strauss-Kahn on sexual-assault charges in New York.

Gasoline prices fell less than crude, dropping 0.7 percent today as flooding from the Mississippi River threatened refineries. Futures for June delivery lost 2.09 cents to $3.0535 a gallon.

Louisiana opened four of the 25 gates at the Morganza floodway, allowing the Mississippi River to pour into the Atchafalaya River basin. The area has 2,264 oil or natural gas wells that each day produce 19,278 barrels of crude, about 10 percent of Louisiana’s onshore total, and 252.6 million cubic feet of gas, according to the state.

Louisiana Refineries

The Mississippi was likely to reach a flow rate of 1.62 million cubic feet per second unless water was diverted, putting in peril the levees at Baton Rouge, home to an estimated 229,000 people and industrial areas that include an Exxon Mobil Corp. refinery, the company’s second largest U.S. facility.

Alon USA Energy Inc.’s refinery in Krotz Springs is in a zone under a mandatory evacuation order, St. Landry’s Parish spokeswoman Francine Sias said. Alon spokesman Blake Lewis said the parish had granted the company an extension. A temporary levee is being constructed by employees to protect the 83,000-barrel-a-day refinery and 243 nearby homes.

Oil prices will head lower in the July-to-December period amid signs of demand destruction, said Blanch at a media briefing in Hong Kong today. Brent may trade at an average $122 a barrel in the second quarter and $94 in the fourth, he said.

Net-long positions in oil by managed-money investors decreased 13 percent, or 38,110 futures and options combined, to 255,713 in the week ended May 10, according to the Commodity Futures Trading Commission’s Commitments of Traders report.

Stimulating Production

“At the moment, anything seen to adversely impact growth in the U.S. gets factored into oil prices,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, who predicted crude in New York will average $113 a barrel in the third quarter.

The U.S. administration will begin stimulating domestic crude production to blunt rising gasoline prices with measures including encouraging drilling in Alaska and giving oil companies more time to comply with safety regulations, Obama said in his weekly address.

Brent has climbed 20 percent this year as unrest in the Middle East and North Africa toppled leaders in Tunisia and Egypt and spread to Libya, Algeria, Bahrain, Iran, Syria, Oman and Yemen.

Yemen’s Joint Meetings Party, a coalition of six opposition groups, says a plan to end the country’s political crisis is dead following a visit by the chief envoy of Arab Gulf states seeking to broker a deal.

The European benchmark traded at a premium of $14.51 a barrel to U.S. futures, compared with $14.18 on May 13. The difference between front-month contracts in London and New York surged to a record $19.54 on Feb. 21. The spread averaged 76 cents last year.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net; Ann Koh in Singapore at akoh15@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net

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