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Oil Declines as Italy’s Bond Yields Climb to Euro-Era Records

Oil dropped for the first time in six days after Italian bond yields surged to euro-era records and a German newspaper reported that Chancellor Angela Merkel’s party wants to enable countries to exit the common currency.

Futures fell 1.1 percent after Italian bond yields topped the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. Merkel’s Christian Democratic Union may propose easing rules on euro membership, Handelsblatt reported in a preview of an article to be published tomorrow, citing unidentified participants in the discussion.

“The European debt crisis has negative implications for oil prices and demand,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston.

Crude oil for December delivery dropped $1.06 to settle at $95.74 a barrel on the New York Mercantile Exchange. The contract climbed to $97.84 earlier, the highest intraday price since Aug. 1. Futures are up 4.8 percent this year.

Brent oil for December settlement declined $2.69, or 2.3 percent, to end the session at $112.31 a barrel on the London-based ICE Futures Europe exchange. The difference between Nymex crude and Brent narrowed to $16.57 today. The spread is down 41 percent from a record high of $27.88 on Oct. 14.

Oil trading volume in New York was 748,402 contracts at 3:31 p.m. in New York, exceeding the three-month average of 681,000 contracts for the first time since MF Global Holdings Ltd. filed for bankruptcy on Oct. 31. Volume tumbled to 381,435 on Oct. 31, the lowest level since April 29.

Berlusconi’s Resignation Offer

Italy’s Prime Minister Silvio Berlusconi’s offer to resign left his government struggling to implement austerity measures. The yield on the country’s five-year note jumped 70 basis points to 7.57 percent. The higher deposits demanded by LCH Clearnet SA, a clearing house that guarantees investors’ trades are completed, drove benchmark indexes lower in Europe and the U.S.

Italy is the single currency’s third-largest economy after Germany and France.

A commission within the Christian Democratic Union that is crafting a framework to be presented at a party meeting has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, according to the Handelsblatt newspaper.

‘Following Equities’

The Standard & Poor’s 500 Index dropped 3.7 percent to 1,229.13, and the Dow Jones Industrial Average fell 3.2 percent to 11,781.02 at 4:02 p.m. in New York. The euro tumbled 2.1 percent to $1.3544. A weaker common currency and a stronger dollar usually reduces the appeal of raw materials as an alternative investment.

“Oil and all of the other commodities are following equities and that will continue to be the case until we get some clarity out of Europe,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “All of the attention is moving from Greece to Italy. The Italian bond yields are killers.”

Greek Prime Minister George Papandreou’s drive to put together a unity government fell into disarray as rival parties squabbled over the next premier. Papandreou met with President Karolos Papoulias in Athens today to resign as criticism grew over delays in naming a new prime minister.

Negotiations on a government between Papandreou and Antonis Samaras, leader of the opposition New Democracy party, dragged on for a third day today as the two sides disagreed on a prime minister and the opposition balked at EU demands for written commitments to secure a bailout package.

Unexpected Stockpile Decline

Oil rose to a three-month high earlier after the U.S. Energy Department reported an unexpected supply drop. Crude oil inventories fell 1.37 million barrels to 338.1 million last week, according to the report. Stockpiles were forecast to rise 500,000 barrels, according to the median of 13 analyst estimates in a Bloomberg News survey.

“When looking at the inventory numbers, it’s important to remember that one week does not a trend make,” Hodge said.

Inventories of distillate fuel, a category that includes heating oil and diesel, decreased 6.02 million barrels to 135.9 million in the week ended Nov. 4, the biggest drop since 2004. Gasoline inventories declined 2.11 million barrels to 204.2 million, the lowest level since June 2009, the report showed.

Refineries operated at 82.6 percent of capacity last week, down 2.7 percentage points from the prior week and the lowest level since May, the report showed. Analysts projected a 0.4-point increase.

“The drop in inventories had nothing to do with a lack of global availability of oil,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It looks like a defensive measure by refiners who don’t want to have a lot of oil on hand.”

Oil volume totaled 651,879 contracts yesterday, 4.3 percent below the three-month average. Open interest was 1.37 million contracts, the most since Oct. 26.

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