Crude Oil Falls to a Four-Month Low in London on IEA Release

Crude oil fell to a four-month low in London and was little changed in New York following the International Energy Agency’s announcement yesterday of the release of 60 million barrels to the market.

Futures in London tumbled 8 percent in two days on the IEA’s plan to respond to the drop in Libyan exports by the coordinated action of members. Oil also dropped as Oracle Corp. led U.S. equities lower and on concern Italian banks will be downgraded by Moody’s Investors Service, signaling the Greek debt crisis may spread to other European countries.

“Sentiment in the market has pretty clearly shifted,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “Sentiment would have shifted even without the IEA release because the economy is in pretty bad shape.”

Brent crude oil for August delivery dropped $2.14, or 2 percent, to $105.12 a barrel on the London-based ICE Futures Europe exchange, the lowest settlement price since Feb. 18.

Crude oil for August delivery increased 14 cents to settle at $91.16 a barrel on the New York Mercantile Exchange. The August contract dropped 2.4 percent this week.

Brent, the European benchmark, traded at a premium of $13.96 a barrel to U.S. West Texas Intermediate futures today, the smallest since May 25 based on the settlement. The difference between the front-month contracts reached a record $23.32 a barrel last week amid the loss of Libyan and Nigerian barrels and a surplus of oil at Cushing, Oklahoma, the U.S. storage hub.

Brent Premium

“The Brent premium was related to tightness in the international market, and the release quells those worries,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “There will be additional supply available to make up for any potential shortfall in Europe.”

The U.S. Strategic Petroleum Reserve will provide 30 million barrels of the IEA release, European members will supply about 20 million and Asian nations the remainder.

The IEA has coordinated the use of emergency stockpiles three times since the agency was founded in 1974. The first was during the 1991 Persian Gulf War and the second was after Hurricane Katrina in 2005. The Paris-based IEA is an energy policy adviser to 28 industrialized nations including the U.S., Japan and Germany.

“You now have a new factor in the market,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “In the past the strategic reserve was used to make up for a shortage, now it’s being used as a pricing tool. This will add another level of complexity for analysts looking at the market.”

OPEC Failure

The IEA’s decision came after the Organization of Petroleum Exporting Countries failed to reach an accord on production increases at a June 8 meeting in Vienna. Saudi Arabia pledged following the meeting that it and three other Persian Gulf states would keep consumers sufficiently supplied.

“We’re still adjusting to yesterday’s announcement,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The missing piece of the puzzle is what the Saudis think. We don’t know if the Saudis will offset the SPR release with production cuts, or perhaps grumble and continue pumping as much as before.”

The IEA is using the release as an economic stimulus measure, and if it’s successful in driving down prices, it would serve as a “tax cut” for consumers, boosting both spending and confidence, according to a report today from Daniel Yergin and James Burkhard at IHS-Cambridge Energy Research Associates.

The agency’s move won’t bolster the economy because it’s too small and late, according to analysts led by Francisco Blanch at Bank of America Merrill Lynch in New York.

Immediate Relief

“Lower oil prices will bring immediate relief to consumers, but to us this IEA release comes too little, too late,” analysts led by Blanch said. “The global macro cycle is already decelerating and systemic risks are growing due to the unfolding European sovereign debt crisis.”

U.S. technology shares fell the most among 10 groups in the S&P 500 after Oracle’s unexpected drop in hardware sales, while banks were the biggest drag in Europe after Moody’s Investors Service said it may downgrade 13 Italian lenders.

“The IEA release was a bit of a shock to the market,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Worries about the economy and the Greek debt crisis had been sending prices lower before the release and are coming back to the fore.”

The Standard & Poor’s 500 Index declined 1.2 percent to 1,268.45 and the Dow Jones Industrial Average dropped 115.42 points to 11,934.58. The dollar climbed 0.5 percent to $1.4183 per euro. A stronger dollar reduces the appeal of commodities as an alternative investment.

Oil volume in electronic trading on the Nymex was 646,752 contracts as of 3:31 p.m. in New York. Volume totaled 980,468 contracts yesterday, 47 percent above the average of the past three months. Open interest was 1.51 million contracts.

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