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Oil Declines as Manufacturing Shrinks in China, Euro Area

Oil declined as manufacturing shrank in China and the euro area, bolstering concern that fuel consumption will diminish.

Futures fell 0.7 percent after China’s economy contracted for a sixth month in April, based on a preliminary reading of a purchasing managers’ index. Euro-area services and manufacturing output slipped. The drop in crude accelerated as stocks dropped after Europe’s backlash against budget cuts gained momentum.

“The negative Chinese and European economic data are weighing on the markets,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “There are increasing worries about the European outlook and whether the euro zone will be able to hold it together.”

Crude oil for June delivery decreased 77 cents to settle at $103.11 a barrel on the New York Mercantile Exchange. Futures have declined 8.2 percent in the past year.

Brent oil for June settlement dropped 5 cents to end the session at $118.71 a barrel on the London-based ICE exchange. The European benchmark contract was at a premium of $15.60 to New York futures, up from $14.88 on April 20. The spread between the contracts surged to a record $27.88 on Oct. 14.

The Standard & Poor’s 500 Index decreased 0.8 percent at 3:55 p.m. The dollar strengthened 0.5 percent versus the euro. A stronger U.S. currency reduces the appeal of raw materials as an investment. The Standard & Poor’s GSCI Index of 24 commodities was down 0.3 percent.

Manufacturing Slumps

The preliminary reading of the purchasing managers index for China by HSBC Holdings Plc and Markit Economics showed a contraction that would be the longest since the global financial crisis began if confirmed in the final reading May 2. A euro-area composite index based on a survey of purchasing managers in services and manufacturing fell to a five-month low, London-based Markit said in an initial estimate today.

“The Chinese manufacturing numbers are a bit disappointing as is the European data,” said Phil Flynn, vice president of research at futures brokerage PFGBest in Chicago. “The apparent slowdown in manufacturing in these important markets is raising demand concern.”

The S&P 500 declined, joining a global slump in equities, as the Dutch cabinet offered its resignation to Queen Beatrix after losing the Freedom Party’s support over disagreement on an austerity package. French President Nicolas Sarkozy finished second behind Socialist Francois Hollande in the first round of elections as the anti-euro National Front won a record share of the vote.

Oil prices have moved for more than two years on the latest developments in the euro region’s debt crisis and its projected impact on the continent’s energy demand. The crisis that began in Greece has spread to Ireland, Portugal, Italy and Spain.

‘Unsettling’ Result

“The French election results are unsettling,” Kilduff said. “They won’t make it any easier for the euro-zone to agree on a common approach.”

China accounted for 11 percent of the world’s oil consumption in 2010, compared with 21 percent for the U.S., according to BP Plc’s Statistical Review of World Energy released in June. The 17 countries using the euro accounted for about 12 percent of world use.

Oil in New York reached $110.55 on March 1, the highest intraday level since May 4, amid speculation that Western sanctions aimed at halting Iran’s nuclear program will disrupt Middle East shipments. Prices have dropped 6.7 percent since that peak as tensions have eased.

The first international talks in 15 months on Iran’s nuclear program were held April 14 in Istanbul. The United Nations’ five permanent Security Council members plus Germany are scheduled to meet Iranian delegates next at a May 23 meeting in Iraq.

‘Slowly Bleeding’

“Recent economic headlines are beginning to reflect the damage done by the oil price rise earlier this year,” said Stephen Schork, president of the Schork Group in Villanova, Pennsylvania. “People are antsy about the economy now. The market has been slowly bleeding in recent weeks.”

Electronic trading volume of crude oil on the Nymex was 344,932 contracts as of 3:56 p.m. in New York. Volume totaled 449,851 contracts April 20, 29 percent below the three-month average. Open interest was 1.53 million.

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