Crude Oil Drops Most in a Week as Euro Tumbles on European Debt Crisis

By Margot Habiby - Sep 10, 2011 3:10 AM GMT+0700

Oil dropped the most in a week in New York as the euro tumbled against the dollar on concern that Greece’s deteriorating debt crisis will lead to a default.

Oil fell 2 percent after Europe’s single currency declined to a six-month low and European bank and sovereign credit risk surged to all-time highs. A plan for jobs growth announced yesterday by President Barack Obama failed to boost confidence in the U.S., the world’s largest economy.

“The concerns out of Europe and the positive relationship between oil prices and the euro are the catalyst,” said Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania. “The euro is getting crushed and putting pressure on all our markets right now.”

Crude for October delivery dropped $1.81 to settle at $87.24 a barrel on the New York Mercantile Exchange. Prices rose 0.9 percent this week, the third consecutive advance. Futures have fallen 4.5 percent this year.

Brent crude for October settlement declined $1.78, or 1.6 percent, to $112.77 a barrel on London’s ICE Futures Europe exchange. Brent’s premium to Nymex-traded West Texas Intermediate rose 3 cents to $25.53.

The euro fell 1.5 percent to $1.3669 at 3:23 p.m. in New York, the lowest level since February. A weaker euro and stronger dollar curb commodities’ appeal as an alternative to the U.S. currency. The euro has plummeted 3.8 percent this week.

German Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

Stark’s Resignation

Juergen Stark of Germany resigned from the European Central Bank’s Executive Board today after protesting the bank’s bond purchases on a conference call earlier in the week, said a euro area bank official familiar with the meeting. The purchase program was expanded last month when the ECB started buying Italian and Spanish bonds.

“When Stark stepped down, that signaled the possibility of more German opposition to bailing out Greece,” said Phil Flynn, vice president of research at PFGBest in Chicago. “Oil is pricing the increasing odds of demand destruction on the European concerns and following the president’s speech last night.”

Obama challenged Congress to pass a $447 billion jobs plan “right away” to boost spending on infrastructure, stem teacher layoffs and halve payroll taxes paid by workers and small- business owners. He addressed a joint session of Congress yesterday and campaigned for the plan today in Virginia.

U.S. Economy

The president’s remarks came after Federal Reserve Chairman Ben S. Bernanke yesterday stopped short of outlining new plans to revive growth.

“Bernanke didn’t give any further insight into stimulus measures, and Obama’s speech has been received very tepidly, which continues to weigh on concerns about the U.S. economy,” said Matt Smith, a commodities analyst for Summit Energy Services Inc. in Louisville, Kentucky.

The Standard & Poor’s 500 Index fell 2.7 percent to 1,154.23 at 4:03 p.m. in New York. The Dow Jones Industrial Average dropped 2.7 percent to 10,992.13.

Oil also declined on signals that Libya may export a crude- oil cargo this month for the first time since March from the country’s west. The holder of Africa’s biggest oil reserves is rebuilding production which plunged 97 percent during an armed conflict to depose ruler Muammar Qaddafi, based on Bloomberg News output estimates.

Libyan Exports

“There are two critical factors dominating the outlook for the oil markets at this time, what global economic developments are doing to demand and the prospects for a pickup in Libyan oil exports,” according to a report published today by Deutsche Bank analysts including Adam Sieminski, the company’s Washington-based chief energy economist.

An 80,000-metric-ton cargo of crude is being offered for shipment from the port of Mellitah this month, three people with direct knowledge of the transaction said yesterday. The oil, equal to 600,000 barrels, will be loaded from Sept. 15 to 17, the people said, declining to be identified because the consignment has yet to be publicly announced.

Oil also declined as the National Hurricane Center forecast that Tropical Storm Nate will move toward the Mexican coast, missing the biggest U.S. oil-producing region in the Gulf or Mexico. Nate was 150 miles (240 kilometers) west of Campeche, Mexico, at about 2 p.m. New York time.

Fourteen of 28 analysts, or 50 percent of those in a Bloomberg News survey, forecast oil prices will decline next week amid heightened concern that global economic growth is slowing. Seven respondents, or 25 percent, predicted prices will increase and seven estimated there will be little change. Last week, 50 percent of surveyed analysts projected a drop.

Oil volume in electronic trading on the Nymex was 597,732 contracts as of 3:24 p.m. in New York. Volume totaled 790,112 contracts yesterday, 16 percent above the average of the past three months. Open interest was 1.5 million contracts.

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

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.