Tuesday, April 19, 2011

N.Y. Crude Drops for Second Day as Economic Outlook Spurs Demand Concern


By Margot Habiby

Oil fell for a second day amid signals that oil prices at their highest level since 2008 are pressuring the economy and may cause fuel demand to falter.

Crude has fallen almost $3 a barrel since Standard & Poor’s cut the U.S. long-term credit outlook yesterday. OPEC Secretary General Abdalla el-Badri said there is “no shortage of oil anywhere in the world,” even after supply curtailments in Libya. Iran’s OPEC Governor Mohammad Ali Khatibi said the group is unlikely to alter output targets when it meets in June.

“We’re seeing some unwinding of the pressure that has built up because of the situation in the Middle East with the focus being brought back onto the global economy and the potential weakness caused by these high prices,” said Matt Smith, a commodities analyst for Summit Energy Services Inc. in Louisville, Kentucky.

Crude oil for May delivery slipped 16 cents to $106.96 a barrel at 10:56 a.m. on the New York Mercantile Exchange. Earlier, prices touched $105.50. Futures have risen 31 percent in the past year. The May contract expires at the close of floor trading today. The more-actively traded June futures fell 19 cents to $107.50.

Brent crude oil for June settlement fell $1.56, or 1.3 percent, to $120.05 a barrel on the ICE Futures Europe exchange in London.

Standard & Poor’s put the U.S. government on notice that it risks losing its AAA credit rating unless policy makers agree on a plan to cut budget deficits and the national debt. Concern that Europe’s debt crisis is worsening sent Greek and Portuguese bond yields surging.

“The last couple of months we’ve focused on supply; now the market is focusing again on demand,” said Thina Saltvedt, an analyst at Nordea Bank AB in Oslo. “It looks like the price is starting to hurt the economy.”

Oil traders have turned $80 crude into the second-biggest bet in the options market as a surge in futures to the highest level since 2008 spurred concern demand may tumble.

Open interest, the number of contracts held by traders, more than doubled since January for $80 put options for December 2011 and 2012 as New York futures last week touched a 30-month high of $113.46 a barrel. The two puts, bets that prices will fall, account for 21 percent of the open interest among the top 10 contracts traded on the New York Mercantile Exchange.

Options Contracts
Options contracts that give investors the right to sell December 2012 futures at $80 a barrel rose 21 cents to $4.76 a barrel in electronic trading yesterday on the Nymex. December 2011 $80 puts gained 15 cents to $1.34.

Oil declined yesterday after China increased banks’ reserve requirements to cool inflation, signaling that fuel demand growth may slow, and Saudi Arabian Oil Minister Ali al-Naimi said the market is “oversupplied.” The kingdom is the biggest supplier in the Organization of Petroleum Exporting Countries.

U.S. Treasury Secretary Timothy F. Geithner said the administration and Congress need to work together over the “next couple months” to agree on a framework for cutting budget deficits with “enforceable limits” on accumulating debt. He told Bloomberg Television there is an emerging consensus on “how much we have to do.”

“Oil and the commodity prices were up and rallying on an easy money regime from Washington that’s clearly being reined in now, with the end of quantitative easing and this renewed focus on the budget which was pointedly driven home by the S&P warning shot yesterday,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net.

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