Crude Oil Falls, Snapping Three-Day Gain, as Recession Deepens

By Christian Schmollinger

Feb. 27 (Bloomberg) -- Crude oil fell in New York, paring this week’s increase to 14 percent, on signs the global recession is deepening after Japan’s manufacturers cut production by a record pace.

Oil snapped a three-day rally as Japanese data showed the world’s third-biggest user of crude is headed for its worst postwar recession. Oil gained earlier this week after a U.S. government report showed a drop in gasoline stockpiles and OPEC members called for further cuts in output.

“You’ve got to keep an eye on the bigger picture and these key economic data are still disappointing,” said Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Refinery rates are running at low levels even on a seasonal basis, so it’s natural that you’ll get drawdowns in supplies.”

Crude oil for April delivery fell as much as 86 cents, or 1.9 percent, to $44.36 a barrel on the New York Mercantile Exchange. It was at $44.59 a barrel at 1:55 p.m. Singapore time.

Futures rose $2.72, or 6.4 percent, to $45.22 a barrel yesterday, the highest settlement since Jan. 26. Crude oil is poised for a 7.1 percent gain this month.

Brent crude oil for April settlement declined as much as 45 cents, or 1 percent, to $46.06 a barrel on London’s ICE Futures Europe exchange. It was at $46.23 a barrel at 1:30 p.m. Singapore time.

Gasoline Consumption

Japan’s month-on-month decline in factory output exceeded the December record drop of 9.8 percent, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

Companies are slashing jobs at a faster pace in the U.S., a report yesterday showed. The Labor Department said 667,000 Americans filed initial applications for jobless benefits last week, up from 631,000 the prior week.

U.S. gasoline consumption averaged 9 million barrels a day in the past four weeks, up 1.7 percent from a year earlier, this week’s Energy Department report showed. The department measures shipments from refineries, pipelines and terminals to calculate demand.

“You’ve got to be careful with the gasoline demand figures,” said ANZ’s Pervan. “If you’re looking at it from an implied point of view where you include changes in stocks, it can be skewed if those stocks are drawing down because of lower refinery capacity.”

U.S. refiners operated at 81.4 percent of their capacity in the week ending Feb. 20, down 0.9 percent from the previous week.

Gasoline supplies fell 3.32 million barrels last week, the biggest reduction since September, a report from the Energy Department showed this week.

Gasoline Draw

“The big draw caught everyone off guard,” said Jonathan Kornafel, director for Asia at options traders Hudson Capital Energy in Singapore. “The rally may be a bit overdone and that’s why you’re seeing crude selling off today.”

U.S. retail gasoline prices were at $1.882 a gallon on Feb. 25, according to AAA, the nation’s biggest motoring organization. That’s down from $3.16 a gallon a year ago. Fuel cost an average of $1.616 on Dec. 30.

The increase in U.S. gasoline demand is driven “100 percent by the reduction in price,” said Hudson Capital’s Kornafel. “It took sustained lower prices before you started to see a tiny tick up in demand. But I think the market is so starved for any sort of highlight in demand that it’s enough to send the market higher.”

OPEC Cuts

U.S. oil imports dropped 0.3 percent to 8.77 million barrels a day, the lowest since the week ended Sept. 18, when ports were shut in the aftermath of hurricanes Gustav and Ike, the report showed. OPEC members have cut production and reduced shipments in an effort to increase prices.

The Organization of Petroleum Exporting Countries will reduce crude-oil shipments by 1.7 percent in the month ending March 14, according to Oil Movements. Members will load 22.8 million barrels a day in the period, down from 23.2 million a day in the month ended Feb. 14, the Halifax, England-based based tanker tracker said.

Abu Dhabi National Oil Co. will cut exports of crude oil in April. The United Arab Emirates state-owned producer will ship 17 percent less of Upper Zakum crude oil than contracted, following a 15 percent reduction for March, the company said yesterday. Deliveries of Umm Shaif, Lower Zakum and Murban crude will be cut by 15 percent.

Iran, Venezuela and Iraq said last week that OPEC is prepared to lower production again when the group meets on March 15. Ecuadorian Oil and Mines Minister Derlis Palacios said yesterday that no additional reduction was needed.

“As long as we stay below $50 a barrel, OPEC is going to cut between 500,000 and 1 million barrels a day,” said Hudson Capital’s Kornafel. “They’ve proved themselves. They’ve followed through on the cuts and that is clear.”

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