Oil Falls From Four-Month High Amid Debt-Ceiling Talks

Oil dropped from the highest level in almost four months on concern that debt-ceiling talks will harm the U.S. economy and as a gauge of New York-area manufacturing contracted for a sixth straight month.

Futures in New York declined 0.9 percent after President Barack Obama said yesterday he won’t bargain with Republicans over raising the government’s debt limit and called for separate discussions on spending cuts. The Federal Reserve Bank of New York’s general economic index fell to minus 7.8 this month from a revised minus 7.3 in December.

“Concerns about a possible U.S. default are starting to be felt,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “This is going to roil all the markets.”

Crude oil for February delivery decreased 86 cents to $93.28 a barrel on the New York Mercantile Exchange, the lowest settlement since Jan. 9. Trading volume was 18 percent above the 100-day average. The contract increased to $94.14 yesterday, the highest settlement since Sept. 18. Prices are down 5.5 percent from a year earlier.

Futures were little changed after the American Petroleum Institute said U.S. oil inventories grew 46,000 barrels a day last week to 360.9 million. Crude was down 77 cents at $93.37 a barrel at 4:57 p.m. in electronic trading.

Brent for February settlement dropped $1.58, or 1.4 percent, to end the session at $110.30 a barrel on the London-based ICE Futures Europe exchange. February futures expire tomorrow. The more-active March contract fell $1.32, or 1.2 percent, to $109.63. Volume was 29 percent above the 100-day average.

Spread Narrows

The front-month European benchmark contract was at a premium of $17.02 to West Texas Intermediate oil traded in New York, the narrowest spread based on settlement prices since Sept. 19.

The spread has shrunk since Enterprise Products Partners LP and Enbridge Inc. resumed service of the Seaway pipeline running from Cushing to the Gulf Coast on Jan. 11 at a capacity of 400,000 barrels a day, up from 150,000 barrels. The link provides an outlet for record supplies in the central U.S.

The Treasury Department has been using emergency measures since the end of December to prevent a breach of the $16.4 trillion debt limit. In a letter yesterday to House Speaker John Boehner, Treasury Secretary Timothy Geithner said the department expects to exhaust those measures “between mid-February and early March.”

The debt ceiling has been lifted 79 times since its creation in 1917, 49 of those times during Republican administrations.

Standard & Poor’s lowered the U.S. credit rating in August 2011 after the most recent showdown over the threshold. Oil prices tumbled 7.2 percent the month of the downgrade and an additional 11 percent in September 2011.

Risk Assets

“Some fears about the debt ceiling are coming into the market,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “The debt ceiling was ignored for a while on expectations that they would muddle through, but there’s a chance they won’t. All risk assets are reacting.”

The dollar increased as much as 0.9 percent against the euro. A stronger U.S. currency curbs the appeal of dollar-denominated commodities as an investment.

The New York Fed’s Empire State Manufacturing Index was projected to show a reading of zero, which signals no change in conditions, according to the median of 54 economist responses in a Bloomberg survey. Readings lower than zero signal contraction in New York, northern New Jersey and southern Connecticut.

Retail sales increased 0.5 percent in December, Commerce Department figures showed. The median forecast of 83 economists surveyed by Bloomberg called for a 0.2 percent rise.

German Economy

Germany’s economy, Europe’s largest, probably shrank in the final quarter of 2012. Gross domestic product may have dropped as much as 0.5 percent from the third quarter, the Federal Statistics Office in Wiesbaden said today in a preliminary estimate. It said growth slowed to 0.7 percent in 2012 from 3 percent in 2011.

U.S. crude oil inventories probably increased a second week after production climbed to the highest level in almost 20 years, a Bloomberg survey showed. Stockpiles rose by 2.2 million barrels in the seven days ended Jan. 11, according to the median of 11 analyst estimates before an Energy Information Administration report tomorrow.

Production advanced 17,000 barrels a day to 7 million in the week ended Jan. 4, the most since March 1993, the EIA, the Energy Department’s statistical arm, said last week.

Gasoline Supply

Gasoline supplies rose 2.7 million barrels, according to the survey. An advance of that size would leave stockpiles at 235.8 million barrels, the highest level since February 2011. Inventories of distillate fuel, a category that includes heating oil and diesel, probably rose 1.5 million barrels.

Electronic trading volume on the Nymex was 538,005 contracts as of 4:58 p.m. Volume totaled 580,792 contracts yesterday, 21 percent above the three-month average. Open interest was 1.5 million, the most since Dec. 17.

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