Oil Drops for Third Day on Concern Debt Crisis to Limit Growth, Fuel Need

By Grant Smith and Ben Sharples - Sep 12, 2011 7:10 PM GMT+0700

Oil fell for a third day in New York, the longest losing streak in a month, as investors bet that Europe’s debt crisis will limit economic growth. Production resumed in the Gulf of Mexico as the threat of storms eased.

West Texas Intermediate crude slid as much as 2.6 percent while equities tumbled and the euro slumped on growing speculation that Germany is preparing for a Greek debt default. Nate, a storm over eastern Mexico, weakened as it moved further inland, the U.S. National Hurricane Center said. The oversupply of oil may disappear as the market absorbs the release of stockpiles, Goldman Sachs Group Inc. said. OPEC said Libya will be able to restore most oil production within six months.

“The debt crisis in Europe is leading to fear about economic growth,” said Hannes Loacker, an analyst at Raiffeisen Bank International AG in Vienna and the fifth most-accurate forecast of Brent prices in the eight quarters to June. “If sentiment in the equity markets remains bad, it will be tough for oil to move higher.”

Crude for October delivery fell as much as $2.24 to $85 a barrel in electronic trading on the New York Mercantile Exchange and was at $86.08 at 12:36 p.m. London time. The contract slipped $1.81 to $87.24 on Sept. 9. Prices are 11 percent higher than a year ago.

Brent oil for October settlement decreased $1.72, or 1.5 percent, to $111.05 a barrel on the London-based ICE Futures Europe Exchange. The European benchmark contract was at a premium of $24.88 to U.S. futures, compared with the record close of $26.87 on Sept. 6.

Gulf of Mexico

The euro fell to its lowest level since 2001 against the yen and slid versus the dollar. Speculation that German Chancellor Angela Merkel is preparing for a Greek default curbed demand for the shared currency, limiting investor demand for dollar-denominated oil futures as a hedge.

About 6.2 percent of oil production and 4 percent of natural gas output from the Gulf of Mexico are still shut after Lee battered the area, a Bureau of Ocean Energy Management, a Regulation and Enforcement report showed Sept. 9. Nate, downgraded to a post-tropical cyclone, was about 75 miles (120 kilometers) southwest of Tuxpan, Mexico, the U.S. National Hurricane Center said in an advisory before 10 p.m. Mexico City time yesterday.

Bullish Bets

Hedge funds cut bullish bets on oil last week while increasing those on gasoline. The funds and other large speculators reduced wagers that prices will rise, with the number of futures and options combined falling by 5,780, or 3.6 percent, to 155,837, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Bets motor fuel will rally increased by 13 percent, the data showed.

“The idea that European and U.S. economic growth is going to be weak over the next year seems like a reasonable forecast,” said John Vautrain, a senior vice president at Purvin & Gertz Inc. in Singapore. “WTI will stay enormously depressed, $10 to $20 a barrel or more below Brent.”

In London, money managers raised bullish bets on Brent crude by 12 percent in the week ended Sept. 6, according to data from ICE Futures Europe.

Speculative bets that prices will rise, in futures and options combined, outnumbered short positions by 72,455 contracts, the London-based exchange said today in its weekly Commitment of Traders report. Net-long positions rose by 8,024 contracts, from 64,431 a week earlier.

Libya Output

Libya will be able to restore most of the oil production halted during fighting against Muammar Qaddafi in six months, and resume full capacity in 18 months, according to the Organization of Petroleum Exporting Countries. OPEC “marginally” lowered estimates for global oil consumption in 2012, and trimmed its 2011 assessment by 150,000 barrels a day, in a monthly report today.

Still, oil markets are likely to tighten in the remainder of the year and into 2012 as the market absorbs additional supplies from the release of strategic stockpiles in the U.S., Goldman Sachs Group said in a research note e-mailed today.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net