Oil Enters Bear Market on Europe Debt Crisis, Slow U.S. Economy

Oil Enters Bear Market on Europe Debt Crisis, Slow U.S. Economy
Oil for July delivery traded at $87.70 a barrel, down 12 cents, in electronic trading on the New York Mercantile Exchange at 12:08 p.m. Sydney time. The contract slid yesterday $2.94 tom $87.82, the lowest close since Oct. 21. Photographer: Scott Eells/Bloomberg

Oil entered a bear market in New York as it headed for the biggest monthly drop in more than three years on speculation Europe’s worsening debt crisis and a slowing U.S. economy will reduce fuel demand.

Futures today are 20 percent lower than their highest settlement this year, a definition of a bear market. Prices slipped as the cost of protecting Spanish bonds against default climbed to a record yesterday and a Greek poll showed support for anti-austerity parties ahead of elections. A report yesterday showed pending U.S. home sales in April slid the most in a year. Oil peaked in February on concern that tension with Iran will disrupt global supplies.

“Prices have fallen on the pessimistic expectations of the global economic recovery,” said Ken Hasegawa, a commodity derivative sales manager at Newedge Group in Tokyo who sees New York crude falling to $75 a barrel by the third quarter. “The problem is not only in Greece, but several countries in Europe. And from a fundamental point of view, we don’t have any shortage concerns, even with the Iran embargo.”

Oil for July delivery traded at $87.65 a barrel, down 17 cents, in electronic trading on the New York Mercantile Exchange at 2:21 p.m. Sydney time. The contract slid $2.94 yesterday to $87.82, the lowest close since Oct. 21.

Crude in New York has dropped 20 percent since its peak close this year of $109.77 a barrel on Feb. 24. Prices are down 16 percent this month, set for the largest monthly drop since December 2008, and 11 percent lower this year.

‘Demand Destruction’

Brent oil for July settlement decreased 0.3 percent to $103.20 a barrel on the London-based ICE Futures Europe exchange. Prices have dropped 14 percent this month, the most since May 2010. The European benchmark contract’s premium to West Texas Intermediate was at $15.55, from $15.65 yesterday.

“We’re seeing demand destruction across the board,” said Jonathan Barratt, chief executive officer of Barratt’s Bulletin, a commodity-markets newsletter in Sydney. “I was looking for a Middle Eastern premium to be built in, but Spain’s concern seems to be overriding that and filtering through the whole commodity complex. People are scared to spend.”

Costs to protect Spanish government debt climbed to a record. Credit-default swaps linked to the country’s bonds climbed 23 basis points to 583 at 11:44 a.m. in London yesterday, according to data compiled by Bloomberg.

Technical Indicators

The countries using the euro accounted for about 12 percent of global oil demand in 2010, according to BP Plc’s Statistical Review of World Energy released in June. The U.S. accounted for about 21 percent, the report showed.

Oil may extend its decline in New York as the monthly moving average convergence-divergence indicator falls below its signal line, showing a loss of positive momentum, according to data compiled by Bloomberg. Investors tend to sell contracts on a so-called bearish MACD crossover. Futures have short-term technical support along the lower Bollinger Band on the daily chart, around $85.45 a barrel today.

U.S. crude output rose 90,000 barrels a day to 6.24 million in the week ended May 18, the highest level since February 1999, Energy Department data showed last week. Oil production in the Organization of Petroleum Exporting Countries climbed 305,000 barrels to 31.405 million barrels a day in April, the most since October 2008, according to a Bloomberg survey.

Market Oversupply

“The market is oversupplied by around 500,000 barrels a day,” said Dominic Schnider, the Singapore-based global head of commodity research at UBS AG’s wealth-managment unit, who sees New York crude falling to $80 a barrel and Brent to $95. “The speculative interests are still high in oil. That makes it extremely vulnerable to further deterioration.”

Long positions in crude, or wagers on rising prices, on crude on the New York Mercantile Exchange outnumbered short bets by 136,751 contracts in the week ended May 22. That’s 12 percent higher than the average in Commodity Futures Trading Commission data compiled by Bloomberg going back to at least June 2006.

Iran, the second-biggest crude producer in OPEC, faces Western sanctions including an oil embargo starting July 1 aimed at persuading it to stop enriching uranium. The Persian Gulf nation has increased its stockpile of 20 percent medium-enriched uranium by a third since February, the UN’s International Atomic Energy Agency said in a May 25 report.

U.S. Stockpiles

Iran and Western negotiators agreed to hold another round of talks about the country’s nuclear program next month after failing to reach a deal at a summit in Baghdad last week. The government in Tehran faces four set of United Nations sanctions urging the country to stop enriching uranium.

U.S. oil stockpiles dropped 353,000 barrels to 385.9 million last week, according to the American Petroleum Institute, a Washington-based industry group. That is the first drop in four weeks. An Energy Department report today will likely show that supplies climbed 1 million barrels to 383.5 million last week, the most since 1990, according to analysts surveyed by Bloomberg.

Gasoline inventories rose 2.1 million barrels, API data showed. The Energy Department will probably show they slid 1 million barrels, according to the survey. The agency is scheduled to release its report at 11 a.m. today.

The API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

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