Oil Drops Amid Broader Selloff as Fed Points to Global Risks

Fed Puts Pressure on Oil as OPEC Sees Higher Prices
  • Yellen sees potential for global economic slowdown to spread
  • U.S. crude production declines for a sixth week in EIA data

Oil dropped for a second day after the Federal Reserve left borrowing costs unchanged so it can take more time to ponder the impact of recent global economic turmoil on the U.S.

Futures tumbled 4.7 percent in New York and 3.3 percent in London. U.S. and European equities declined along with industrial metals after Fed Chair Janet Yellen sounded caution over slowing growth in China, the second biggest oil-consuming country after the U.S. 

Oil is down more than 25 percent from this year’s closing peak in June amid a global oversupply that Goldman Sachs Group Inc. predicts may keep prices low for the next 15 years. U.S. crude inventories decreased through Sept. 11 as output slid a sixth week, government data showed.

"Equities and oil are down on shared concerns about global economic growth," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone.

West Texas Intermediate for October delivery dropped $2.22 to settle at $44.68 a barrel on the New York Mercantile Exchange, the biggest decrease since Sept. 1. Prices rose 5 cents this week.

U.S. Supplies

Brent for November settlement fell $1.61 to end the session at $47.47 a barrel on the London-based ICE Futures Europe exchange. The volume of all futures traded was 24 percent below the 100-day average at 2:57 p.m. in New York.

Yellen heeded calls from the World Bank and International Monetary Fund to avoid destabilizing global markets with the Fed’s first rate increase in almost a decade. Volatility soared in August across currency, commodity and equity markets amid concerns that growth is slowing in China.

"The Fed raised doubts about the global economy, which are being taken as a negative demand indicator," Bob Yawger, director of the futures division at Mizuho Securities USA in New York, said by phone. "The Chinese economic situation is worse than previously anticipated."

The Standard & Poor’s 500 Index slipped 1.5 percent, following declines in European equities.

Oil services companies led declines in energy stocks as the falling oil price is seen crimping investment. Diamond Offshore Drilling Inc. tumbled 9.1 percent at 2:59 p.m., while Ensco Plc dropped 8.9 percent. Shares of Exxon Mobil Corp., the biggest U.S. energy producer, decreased 2.4 percent.

Output Down

U.S. crude output has slipped by 493,000 barrels a day since the start of June when the nation pumped at the fastest rate since 1983, according to weekly data from the Energy Information Administration. While nationwide supplies declined last week, they remain about 100 million barrels above the five-year seasonal average, according to the EIA.

Oil explorers idled rigs for a third straight week in the U.S. Rigs targeting oil in the U.S. fell by 8 to 644, Baker Hughes Inc. said on its website Friday. The rig count declined by 10 last week.

"This is a really weak market," Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts, said by phone. "Companies are cutting costs and production will decline. Once the industry is seen righting itself, it will be hard for prices to move lower."

The Organization of Petroleum Exporting Countries predicts oil will rise gradually to $80 a barrel in 2020 as supply growth outside the group weakens, according to an internal research report from the group seen by Bloomberg. The average selling price of OPEC crude will increase by about $5 annually to 2020 from $55 this year, it said.

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