Oil Falls on Speculation of Slow Recovery, Swine Flu Outbreak

By Gavin Evans and Christian Schmollinger

April 27 (Bloomberg) -- Crude oil fell, snapping four days of gains, on concern the U.S. economy will keep shrinking and the swine flu outbreak will curtail air travel.

The economy in the world’s largest oil consumer will continue to contract “for some time,” Lawrence Summers, director of the White House National Economic Council, said yesterday. Increased output by non-OPEC producers has left the market oversupplied by about 720,000 barrels a day, said Algerian Oil Minister Chakib Khelil.

“There are so many downside risks to the global economy,” said Toby Hassall, research analyst at Commodity Warrants Australia Pty in Sydney. “It’s difficult to see a really sustained rally in oil.”

Crude oil for June delivery fell as much as $1.42, or 2.8 percent, to $50.13 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $50.18 a barrel at 2:47 p.m. in Singapore.

The contract jumped 3.9 percent to $51.55 a barrel on April 24 as a weaker dollar and rising equity prices boosted investment in commodities. Oil gained $5.67 in its first four- session rally in a month, trimming the weekly decline to 1.8 percent.

Swine Flu

Asian stocks markets fell today as the swine-flu outbreak extended beyond Mexico and the U.S., prompting concern of a pandemic and forcing Asian countries to screen travelers.

Sony Corp. and Samsung Electronics Co. are among the Asian companies that have restricted travel to Mexico after 80 deaths there. Japan, Malaysia and Singapore will screen passengers at checkpoints for fever.

Air China Ltd., Singapore Airlines Ltd. and Qantas Airways Ltd. led declines by Asia-Pacific carries as the swine-flu cases may limit travel. Trips on the region’s airlines plummeted after the outbreak of Severe Acute Respiratory Syndrome in 2002 and 2003 in China, Singapore and Hong Kong.

“The airline stocks have all sunk,” said Victor Shum, a senior principal at oil industry consultants Purvin & Gertz Inc. in Singapore. “The concern is that this gets to be like SARS and then that will impact the jet fuel markets and global economy.”

Crude prices need to be at $70 a barrel to ensure continued investment in the industry, Abdalla el-Badri, secretary-general of the Organization of Petroleum Exporting Countries, said in Algiers yesterday. Oil may reach $60 a barrel by the end of 2009, Khelil said.

OPEC Output

OPEC pumps about 40 percent of the world’s oil. The group agreed last year to cut output by 4.2 million barrels and will review production again when it meets May 28.

Saudi Arabia, the biggest producer, is under pressure from the rest of OPEC to pare output further, the Kingdom’s former oil minister Sheikh Ahmad Zaki Yamani said in Cairo yesterday.

Crude prices gained last week as stock markets climbed on optimism that the world is past the worst of the recession.

“As long as people are playing commodities as a proxy for the global economy, we’ll continue to see a floor under prices around the $50 level,” said Jonathan Kornafel, a director for Asia at options traders Hudson Capital Energy in Singapore. “If you look at the fundamentals though, prices should be about $10 lower. Demand is weak and supplies are high.”

U.S. oil stockpiles rose for a seventh week to 370.6 million barrels on April 17, the highest since September 1990.

Short Positions

Hedge-fund managers and other large speculators are betting on declining New York oil futures for the first time in six weeks, according to U.S. Commodity Futures Trading Commission data.

Speculative net-short positions, or bets prices will fall, outnumbered long positions by 14,605 contracts on April 21, the Washington-based commission said April 24. A week earlier, traders were net-long 4,962 contracts.

“That’s the way people are trading,” Hudson Capital’s Kornafel said. “They are trading long below $45 and trading short above $50.”

Brent crude for June settlement fell as much as $1.17, or 2.3 percent, to $50.50 a barrel on London’s ICE Futures Europe exchange.

The world’s 20 largest nations will spend $820 billion to shore up their economies this year and $660 billion in 2010, the International Monetary Fund said yesterday. The biggest effect from the measures may come toward the end of this year, an IMF official told reporters on condition of anonymity.

Expectations of that recovery have been reflected in equity markets, which have in-turn supported crude prices, Hassall said. While physical demand remains weak, oil prices may climb “toward $55” a barrel if stock prices can extend their gains.

“But it’s a bit of a stretch given we have very high levels of inventory, which are still rising,” he said.

To contact the reporters on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net; Christian Schmollinger in Tokyo at christian.s@bloomberg.net