Crude Oil Is Poised for Record Monthly Drop as Demand Declines

By Christian Schmollinger and Grant Smith

Oct. 31 (Bloomberg) -- Crude oil fell in New York, poised for its biggest monthly drop since trading began in 1983, on concern that the decline in the U.S. economy will curb fuel demand in the world's largest energy user.

Oil retreated, taking this month's decline to 37 percent, after the U.S. Commerce Department said yesterday that gross domestic product contracted in the third quarter at the biggest annual pace since 2001. Showa Shell Sekiyu K.K., Royal Dutch Shell Plc's Japanese unit, will cut its crude processing by 7 percent during the fourth quarter on falling domestic demand.

``The outlook for demand remains weak while we wait for economic rescue measures to feed their way through the system,'' said Christopher Bellew, senior broker at Bache Commodities Ltd. in London. ``Even in emerging markets the growth there is likely to be lower than was previously expected.''

Crude oil for December delivery fell as much as $2.84, or 4.3 percent, to $63.12 a barrel. It was at $63.12 a barrel at 10:46 a.m. London time on the New York Mercantile Exchange. Oil's monthly decline may surpass February 1986 as the worst month ever, when it dropped 30 percent to $13.26 a barrel.

Prices have tumbled 56 percent from a record $147.27 on July 11 and are down 32 percent from a year ago. Futures dropped $1.54, or 2.3 percent, yesterday to settle at $65.96 a barrel.

Oil climbed more than $4 a barrel on Oct. 29, the biggest gain in a month, after the U.S. and China, the two biggest energy consumers, cut interest rates to spur economic growth. Prices also rose because the dollar fell the most against the currencies of six major U.S. trading partners since 1998.

Slowing Demand

Showa Shell said today it will process about 465,000 barrels a day from October to December. Nippon Oil Corp., Japan's largest refiner, said yesterday it will continue processing less crude than a year ago.

Monthly data for U.S. August fuel consumption, measured in terms of products supplied by refiners, dropped to 17.4 million barrels a day, according to the Petroleum Supply Monthly. That was down from 19.1 million barrels in August 2007.

Brent crude oil for December settlement fell as much as $3.09, or 4.9 percent, to $60.62 a barrel on London's ICE Futures Europe exchange. It was at $61.36 a barrel at 10:46 a.m. London time. Prices have fallen 32 percent in the past year.

Iran said it will start to cut 199,000 barrels a day of its oil production as of tomorrow, following OPEC's decision to reduce supply, according to Iranian state-run news service IRNA. The Organization of Petroleum Exporting Countries agreed on Oct. 24 to cut production by 1.5 million barrels a day.

Crude oil may rebound next week on speculation that interest-rate cuts in the U.S. and China will boost fuel demand.

Sixteen of 28 analysts surveyed by Bloomberg News, or 57 percent, said prices will increase through Nov. 7, the most bullish response since the week ended Aug. 15. Six respondents, or 21 percent, said oil will decline and six forecast little change. Last week 41 percent expected futures to decline.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net. Grant Smith in London at gsmith52@bloomberg.net