Oil Falls on Signs Gaza Cease-Fire Imminent

Oil tumbled from a one-month high as Hamas said a draft accord for a cease-fire that would end fighting between Israel and Palestinian groups in the Gaza Strip is almost ready.

Futures dropped 2.8 percent after Hamas official Osama Hamdan said by phone from Beirut that the cease-fire will take effect at midnight. His comments came as U.S. Secretary of State Hillary Clinton flew to the region to join truce talks. Prices surged 2.7 percent yesterday as the conflict escalated.

“Crude is down because cooler heads are prevailing in the Middle East,” said Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania. “The huge run-up yesterday is being exorcised.”

Crude oil for January delivery declined $2.53 to settle at $86.75 a barrel on the New York Mercantile Exchange. It was the biggest decrease since Nov. 7. The contract surged to $89.28 yesterday, the highest settlement since Oct. 19. Prices have dropped 12 percent this year.

Brent oil for January settlement slipped $1.87, or 1.7 percent, to end the session at $109.83 a barrel on the London-based ICE Futures Europe exchange.

After the oil market settled, CNN quoted an unidentified Egyptian official as saying that there would be no announcement of a truce tonight. Nymex futures pared their decline to $87.01 in electronic trading at 3:23 p.m.

The conflict in Gaza threatens further instability in the Middle East and North Africa after a wave of uprisings since last year, including one in Libya that almost entirely cut the nation’s crude exports. The region accounted for 36 percent of global oil output and held 52 percent of proved reserves in 2011, according to BP Plc’s Statistical Review of World Energy.

‘Every Headline’

“The possibility of a cease-fire in the Middle East makes yesterday’s move look overdone,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “We will be paying attention to every headline from the region.”

Clinton will visit Jerusalem, Cairo and the West Bank town of Ramallah, said Ben Rhodes, White House deputy national security adviser. “The goal on that trip is for everybody to use their voices, their influence, for a peaceful outcome,” he said at a briefing in Phnom Penh, Cambodia.

An Israeli official, who spoke anonymously because of the sensitivity of the matter, said that if talks failed, Israel was prepared to invade. Israeli officials have said any cease-fire must include a long-term agreement with Hamas to halt the firing of rockets that can hit 4.5 million people, or half the country’s population.

Clinton Visit

“The fact that Clinton is flying to the region at least shows that the U.S. is getting moderately involved in finding a solution,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion.

Prices also decreased on speculation that an Energy Department report tomorrow will show that U.S. crude inventories rose to a four-month high last week. Stockpiles probably increased by 1 million barrels, according to the median of 11 analyst responses in a Bloomberg survey.

U.S. output increased 32,000 barrels a day to 6.71 million in the week to Nov. 9, the fastest rate since May 1994, the department’s report showed. Production was up for 10 weeks, the longest string of gains since 2008. Inventories also may have increased as Phillips 66’s 238,000-barrel-a-day Bayway refinery in New Jersey remained shut after Hurricane Sandy, which hit the East Coast on Oct. 29.

The Energy Department is scheduled to release its weekly report at 10:30 a.m. tomorrow in Washington. The industry-funded American Petroleum Institute in Washington will publish its own stockpile data today.

U.S. Economy

Price declines will be limited because of the improving U.S. economic outlook, said Phil Flynn, senior market analyst at the Price Futures Group in Chicago.

New-home construction unexpectedly climbed to a four-year high in October, more evidence of a revival in the industry that’s helping propel the U.S. economy. Housing starts rose 3.6 percent to a 894,000 annual rate, the fastest since July 2008 and exceeding all estimates in a Bloomberg survey, Commerce Department figures showed today in Washington.

“The housing starts number was explosive and may be a harbinger of things to come,” Flynn said. “Optimism about the economy should lead to more of a risk-on trade once the Israeli-Palestinian situation moves from the forefront.”

Federal Reserve Chairman Ben S. Bernanke said in a speech in New York today that an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth.

Electronic trading volume on the Nymex was 561,481 contracts as of 3:23 p.m. Volume totaled 492,706 contracts yesterday, 6.9 percent lower than the three-month average. Open interest was 1.47 million, the least since Aug. 21.

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