Oil Falls as Italian Bond Yields Climb, Adding to Debt Crisis

Oil declined as Italy’s borrowing costs rose at an auction today, deepening concern Europe will struggle to contain the debt crisis.

Futures fell 0.9 percent after Italy sold 3 billion euros ($4.1 billion) of five-year notes priced to yield 6.29 percent, the most since June 1997. Crude earlier climbed to $99.69 a barrel, the highest level since July 26, after Mario Monti was offered the post of Italian prime minister yesterday.

“There’s a growing realization that reform in Italy won’t occur overnight,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The Italian economy and political system have been confounding experts for a long time.”

Crude oil for December delivery dropped 85 cents to settle at $98.14 a barrel on the New York Mercantile Exchange. Futures are up 7.4 percent this year. Prices rose 5 percent last week and have increased for six consecutive weeks, the longest run of gains since April 2009.

Brent oil for December settlement fell $2.27, or 2 percent, to end the session at $111.89 a barrel on the London-based ICE Futures Europe exchange. The difference between Nymex crude and Brent narrowed to $13.75 today, the least since May 25 based on closing prices. The spread is down by more than half from a record high of $27.88 on Oct. 14.

Equities and the euro dropped as Italian borrowing costs increased. The Standard & Poor’s 500 Index fell 1 percent to 1,251.78, and the Dow Jones Industrial Average decreased 0.6 percent to 12,078.98. The euro dropped 0.9 percent to $1.3626 at 4:34 p.m. in New York. A weaker euro and stronger dollar reduce the appeal of commodities as an investment.

‘Really Beat Up’

“The euro is getting really beat up today,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. “The situation both in Europe and here is still uncertain. This market has rocketed higher recently, reaching levels that are hard to justify and will harm economic growth.”

Monti will try to reassure investors that Italy can cut a 1.9 trillion-euro ($2.6 trillion) debt and spur growth that has lagged the euro-region average for more than a decade.

German Chancellor Angela Merkel called for an overhaul of the European Union, advocating closer political ties and tighter budget rules in her most explicit prescription for ending the debt crisis.

Speaking to her Christian Democratic Union party’s annual congress in Leipzig, Merkel said a “new Europe” must be created by deepening connection in the 27-nation EU. At the same time, she repeated her rejection of jointly sold euro bonds.

Euro Exit Option

CDU delegates voted to offer euro states a voluntary means of leaving the currency area, for the first time raising the prospect of a move not envisaged under euro rules.

The congressional committee charged with devising a plan to cut the U.S. debt may use a “two-step process,” agreeing only on a broad framework by its Nov. 23 deadline, the top Republican on the panel, Representative Jeb Hensarling of Texas, said.

“There’s a lot of uncertainty out there,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “We’ve yet to see a resolution of the European debt crisis and whether the congressional committee will meet its deadline next week.”

Gasoline Tumbles

Oil also dropped as gasoline fell for a fifth day on weak U.S. demand. Use of the fuel dropped 3.6 percent in the week ended Nov. 4 from a year earlier, the 10th week where demand has lagged behind year-ago levels, MasterCard Inc. said Nov. 8. Drivers used 8.67 million barrels a day, down from 8.99 million a year earlier.

“Gasoline continues to lag the rest of the energy complex because of lackluster demand,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “It is also falling because of the weakness of the WTI-Brent spread, which has shrunk from $25 to $15. Gasoline is priced off of Brent.”

Gasoline dropped 6.85 cents, or 2.6 percent, to $2.5353 a gallon in New York. This was the lowest settlement since Oct. 4.

Crude at $100 to $110 a barrel is fair for producers and consumers, Algerian Oil Minister Youcef Yousfi said today in Doha, Qatar. Oil ministers from Iran, Nigeria and Algeria, which are all members of the Organization of Petroleum Exporting Countries, said yesterday markets aren’t over-supplied.

OPEC will meet in Vienna on Dec. 14 to decide how to respond to rising Libyan output. Libya will pump as much as 800,000 barrels a day by the end of the year, the chairman of state-run National Oil Corp., Nuri Berruien, said yesterday in Doha. The country produced 1.59 million barrels a day in January, before the revolt that toppled Muammar Qaddafi.

Oil volume in electronic trading on the Nymex was 621,157 contracts as of 3:13 p.m. in New York. Volume totaled 613,848 contracts Nov. 11, 8.1 percent less than the three-month average. Open interest was 1.41 million contracts, the most since Oct. 18.

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