Oil Set for Biggest Monthly Drop in Three Years on Debt Crisis

Oil was poised for the biggest monthly drop in more than three years in New York on speculation Europe’s worsening debt crisis and a sputtering U.S. recovery will reduce fuel demand.

Crude fell as much as 0.8 percent after losing 3.2 percent yesterday, the most since May 4. European inflation slowed more than economists forecast this month, cooling to the least in more than a year as the economic slump showed signs of deepening. Oil closed yesterday 20 percent below this year’s highest settlement of $109.77, a movement that often defines a bear market. The number of Americans applying for unemployment insurance payments rose last week to a one-month high, a sign that progress in reducing joblessness may be stalling.

“The market seems fixed on the debt worries in Southern Europe and potential repercussions from the Greek situation spreading,” said Michael Poulsen, an analyst at Global Risk Management in Middelfart, Denmark, who predicts prices will recover by the end of the year. “In the short term we’ll see more market jitters as participants are looking at the headlines, but I’m fairly optimistic we won’t see a break-up in the euro construction any time soon.”

Crude for July delivery lost as much as 67 cents to $87.15 a barrel in electronic trading on the New York Mercantile Exchange, trading for $87.20 at 1:45 p.m. London time. The contract slid $2.94 yesterday to $87.82, the lowest settlement since Oct. 21. Prices are down 17 percent this month, the biggest drop since December 2008, and are 12 percent lower this year.

Brent oil for July settlement on the London-based ICE Futures Europe exchange was at $102.90 a barrel, down 57 cents. Prices have dropped 14 percent this month, the most since May 2010. The European benchmark contract’s premium to New York-traded crude narrowed for a third day to $15.77.

Technical Indicator Falls

First-time claims for jobless benefits increased by 10,000 to 383,000 in the week ended May 26 from a revised 373,000 the prior week, the Labor Department said today. The initial claims exceeded the median estimate of 370,000 in a Bloomberg News survey of economists. The number of people on unemployment benefit rolls dropped.

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.

Market Oversupplied

“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-management 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.”

Iran, OPEC’s second-largest producer, 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.

Iran and Western negotiators will hold another round of talks about the country’s nuclear program next month after failing to reach an agreement 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.

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