Crude Falls to Two-Week Low as Dollar Rises on Fed

West Texas Intermediate crude fell to a two-week low as the dollar rose on expectations the Federal Reserve will trim its monthly bond purchases in September and on concern that China’s cash squeeze may curb its economic growth.

Prices capped the first weekly loss in three as the Dollar Index reached a two-week high. About 44 percent of economists in a Bloomberg survey June 19-20 saw the Fed tapering stimulus, compared with 27 percent June 4-5. China’s one-day repurchase rate touched a record yesterday, prompting speculation the central bank was forced to pump liquidity.

“The dollar strength is definitely weighing on prices,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Crude oil is coming down because the Fed is reducing its support. There is a lot of concern over the situation in China and this potential disruption within China’s banking system.”

WTI for August delivery dropped $1.45, or 1.5 percent, to $93.69 a barrel on the New York Mercantile Exchange, the lowest settlement since June 4. The volume of all futures traded was 19 percent above the 100-day average for the time of day at 2:55 p.m. The July contract expired yesterday after falling $2.84 to $95.40, the biggest loss since Nov. 7. Front-month futures have decreased 4.3 percent this week.

Brent for August settlement fell $1.24, or 1.2 percent, to end the session at $100.91 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade’s premium over WTI widened to $7.22 from yesterday’s $7.01, the narrowest since January 2011.

Dollar Climbs

The Dollar Index, which measures the greenback against six other major currencies including the euro, increased as much as 0.7 percent to 82.524, the highest level since June 6. A stronger dollar reduces oil’s appeal as an investment alternative.

The Standard & Poor’s 500 Index trimmed gains to 0.2 percent after rising as much as 0.7 percent earlier.

“The dollar is king now and you are seeing crude falling further,” said Bill Baruch, a senior market strategist at in Chicago. “We are moving with the equities.”

The Fed will trim its monthly bond purchases to $65 billion in September from the current $85 billion and end buying in June 2014, according to the plurality of estimates by economists in the Bloomberg survey.

Bernanke, speaking on June 19 after a two-day meeting by the Federal Open Market Committee, said the Fed may begin dialing down its unprecedented bond buying this year and end it in mid-2014 if the economy achieves the Fed’s objectives. His remarks sparked a selloff in global financial markets, with stocks falling and bond yields rising for two days.

Bernanke’s Remarks

“We are still driven by Bernanke’s remarks,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “The dollar is the currency that everybody wants to own for the short term and the stronger dollar is adding pressure on oil.”

The People’s Bank of China used reverse-repurchase agreements to inject funds into selected banks, Hexun reported today, citing an unidentified person close to the central bank. The total was less than 400 billion yuan ($65 billion), the financial news website said.

China’s net exports of diesel dropped to the lowest level in seven months as Asia’s largest oil refiner exhausted its export quota and faced the weakest oil consumption in nine months.

Chinese Consumption

Overseas sales of diesel exceeded imports by 177,004 metric tons in May, according to data e-mailed by the General Administration of Customs. That’s equivalent to 42,600 barrels a day and is the lowest level since October, when net exports declined to 107,277 tons, data compiled by Bloomberg shows.

The country’s apparent oil demand, or domestic refinery output plus net import of refined oil, was 9.53 million barrels a day last month, the weakest since August, customs data showed.

“If China is not going to consume oil as they have been, there is no reason for oil to hit the $100 level,” Baruch said about WTI crude.

The U.S. and China, the world’s two largest oil-consuming countries, accounted for about a third of total global demand in 2012, according to BP Plc’s Statistical Review of World Energy.

In the U.S., crude inventories climbed 313,000 barrels to 394.1 million in the week ended June 14, the Energy Information Administration reported on June 19. Stockpiles reached an 82-year high of 397.6 million on May 24.

‘Further Weakness’

“The oil market is vulnerable to further weakness due to a lack of physical tightness, particularly in the U.S.,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York, in an e-mail.

Implied volatility for at-the-money WTI options expiring in August was 21.8 percent, up from 21.4 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 612,605 contracts as of 2:55 p.m. It totaled 812,238 contracts yesterday, 33 percent higher than the three-month average. Open interest was 1.84 million contracts.

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