Oil dropped to a six-week low after the Federal Reserve cited “significant downside risks” to the economy of the U.S., the world’s biggest crude consuming nation.
Futures declined 6.3 percent after the Fed said it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth. A report today showed manufacturing in China, the world’s second-biggest oil consuming country, may contract this month. Prices also dropped on concern banks may face difficulty getting funding.
“Signs of economic weakness are rearing their ugly head in many places and we’re seeing an appropriate response in commodity and equity markets,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.
Crude oil for November delivery fell $5.41 to $80.51 a barrel on the New York Mercantile Exchange, the lowest settlement since Aug 9. It was the biggest one-day drop since Aug. 8. The contract touched $79.66. Prices are down 12 percent this year.
Brent oil for November settlement fell $4.87, or 4.4 percent, to $105.49 a barrel on the London-based ICE Futures Europe exchange, the lowest close since Aug. 9. The contract touched $105.02.
“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Federal Open Market Committee said in Washington after ending a two-day meeting yesterday. “The committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”
Equities and Commodities
The Standard & Poor’s 500 Index declined 3.2 percent to 1,129.56 and the Dow Jones Industrial Average dropped 3.5 percent to 10,733.83. The S&P GSCI Index of 24 raw materials fell as much as 5.2 percent to 605.2, the lowest level this year. All of the commodities declined.
“All exuberance is being excised from the markets,” said Stephen Schork, president of the Villanova, Pennsylvania-based Schork Group Inc. “The odds are very good that we’re already in a recession or will soon be in one.”
Moody’s Investors Service cut its long-term credit ratings on Bank of America Corp. and Wells Fargo & Co. yesterday, saying U.S. support has become less likely if lenders have financial trouble. Citigroup Inc.’s short-term rating also was downgraded.
“The market certainly didn’t like the FOMC statement yesterday,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “There’s a lot of pessimism out there in the world for the overall global economy.”
China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, a preliminary index of purchasing managers showed. The reading of 49.4 for the index released by HSBC Holdings Plc and Markit Economics was down from 49.9 in August.
Euro-area services and manufacturing output contracted for the first time in more than two years in September. A composite index based on a survey of purchasing managers fell below 50 for the first time since July 2009, Markit Economics said today.
“The Chinese manufacturing data was terrible and you’ve got Europe slowing down,” said Phil Flynn, vice president research at PFGBest in Chicago. “The market is pricing in a global economic slowdown.”
The U.S. and China were responsible for 32 percent of global oil demand in 2010, according to BP Plc’s Statistical Review of World Energy released on June 8. The 17 countries using the euro accounted for about 12 percent of world use.
Goldman Sachs Group Inc. lowered its three-month forecast for oil in New York, by 15 percent to $97.50 a barrel. The bank’s previous target was $115 a barrel, analysts led by Samantha Dart in London said in today’s report.
Libya will produce as much as 600,000 barrels a day of oil soon, rising to 1 million barrels in six months, OPEC Secretary-General Abdalla el-Badri said Sept. 19.
The North African country’s oil output and exports came to a standstill after fighting broke out in February between forces loyal to leader Muammar Qaddafi and rebels seeking his ouster. Libya pumped 1.59 million barrels a day in January, according to Bloomberg News estimates.
“Libyan output appears to be on an upward slope,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “The disruption of Libyan output was one of the bullish factors supporting prices. The additional barrels will be coming on the market as demand worsens.”
The Organization of Petroleum Exporting Countries will make a decision on whether to cut supply after monitoring the global economy and the pace of Libya’s rebound, an OPEC official with knowledge of the matter said. Saudi Arabia will probably maintain current output if U.S. and European economic woes don’t spread, he said.
The organization meets next on Dec. 14 in Vienna. At its June meeting, OPEC rejected a Saudi proposal to raise output.
“If prices continue to drop OPEC will have to make tough choices,” Mueller said. “You can’t say it’s a cohesive group after the June meeting.”
Oil volume in electronic trading on the Nymex was 718,675 contracts at 3:07 p.m. in New York. Volume totaled 517,286 contracts yesterday. Open interest was 1.37 million contracts, the least since Dec. 20.