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Oil Caps Year’s Third-Biggest Drop as Banks Cut Growth Outlook

Crude oil capped the third-largest decline of 2011 as commodities fell around the world after Morgan Stanley and Deutsche Bank AG cut their forecasts for global economic expansion.

Futures dropped 5.9 percent and stocks plunged after Morgan Stanley cited an “insufficient” policy response to Europe’s sovereign debt crisis, weakened confidence and the prospect of fiscal tightening. The declines accelerated after U.S. government data showed that jobless claims rose last week.

“The most recent economic data is what’s guiding all asset classes,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington. “This means that just about everything but gold is falling right now.”

Crude oil for September delivery fell $5.20 to settle at $82.38 a barrel on the New York Mercantile Exchange. The two largest declines of 2011 were 8.6 percent on May 5 and 6.4 percent on Aug. 8. Futures have decreased 9.8 percent this year.

Brent oil for October settlement fell $3.55, or 3.2 percent, to $106.99 a barrel on the London-based ICE Futures Europe exchange. The price has risen 13 percent this year.

The European benchmark’s premium to the U.S. futures contract reached a record of $24.48 a barrel, based on closing prices for October. Brent prices have exceeded the cost of West Texas Intermediate oil, the U.S. benchmark, for a year.

Morgan Stanley estimates global economic expansion of 3.9 percent, down from a previous forecast of 4.2 percent, according to an e-mailed report dated today. Morgan Stanley cut its China growth forecast for next year and Deutsche Bank reduced its estimates for the nation for 2011 and 2012.

Chinese Growth

China’s economic growth estimate for next year was cut to 8.7 percent from 9 percent by Morgan Stanley. The bank projects the U.S. economy will increase 2.1 percent in 2012.

“China is going to grow a lot faster than the U.S. even with the downgrade,” Sieminski said. “This will keep WTI under greater downward pressure than Brent.”

The U.S., China and the European Union were responsible for 48 percent of global oil demand in 2010, according to BP Plc’s Statistical Review of World Energy.

U.S. jobless claims climbed by 9,000 to 408,000 in the week ended Aug. 13, the highest in a month, Labor Department figures showed today in Washington. The consumer-price index increased 0.5 percent in July from the prior month, according to the department. The Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July.

‘Extremely Sensitive’ Markets

“All of the markets are extremely sensitive to economic news, especially when it’s negative,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “We were down overnight on the European debt crisis. The increase in jobless claims, rising CPI and Philly Fed number only added to the negative outlook.”

The Standard & Poor’s 500 Index of stocks declined 4.5 percent to 1,140.65 and the Dow Jones Industrial Average dropped 3.7 percent to 10,990.58 at 4:01 p.m. The dollar increased 0.7 percent to $1.4333 against the euro at 3:58 p.m. A stronger U.S. currency reduces the appeal of dollar-denominated commodities as an investment.

“Equities are getting pounded and the euro is falling against the dollar,” said Stephen Schork, president of the Villanova, Pennsylvania-based Schork Group Inc.

The S&P GSCI Index of 24 raw materials fell 3.6 percent to 633.43. Gold, silver and coffee were the only commodities to advance. Gold for December delivery rose 1.6 percent to $1,822 an ounce on the Comex in New York, a record settlement.

‘The One Exception’

“The revised growth projections and weak markets are adding to fears about demand going forward,” Bentz said. “Almost all commodities are falling on this concern. Gold is the one exception because it’s seen as a safe haven.”

Libyan rebels are battling forces loyal to Muammar Qaddafi for control of the Zawiya oil refinery and say they are advancing from the city of Misrata south toward a strategic highway linked with Tripoli, the capital.

New York oil climbed to an intraday high of $114.83 a barrel on May 2 as unrest spread in the Middle East and North Africa. Libyan output fell 50,000 barrels, or 33 percent, to 100,000 in July, the lowest since at least 1962 based on yearly data, a Bloomberg News survey showed.

“The Libyan rebels are making big gains,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “We’re getting closer to the end of this conflict. Once that occurs we may be surprised by how fast output will come back.”

U.S. President Barack Obama, joined by the leaders of the U.K., France, Germany and Canada, called on Syrian President Bashar al-Assad to leave office, saying “the time has come” for the Syrian people to determine their future.

Oil volume in electronic trading on the Nymex was 844,781 contracts as of 3:27 p.m. in New York. Volume totaled 674,170 contracts yesterday, 1 percent below the average of the past three months. Open interest was 1.52 million contracts.

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