Oil Falls, Caps Biggest Quarterly Slump Since 2008 on Bets Demand to Drop

By Margot Habiby - Oct 1, 2011 4:06 AM GMT+0700

Oil capped the largest quarterly drop since the 2008 financial crisis by tumbling to a one-year low as signs of slowing growth in China, the U.S. and Germany heightened concern that fuel demand will weaken.

Futures dropped 3.6 percent after China’s purchasing managers’ index fell for a third month while German retail sales declined in August and U.S. consumer spending slowed. Prices tumbled 17 percent from the end of June, the biggest quarterly decline since the 56 percent plunge during the last three months of 2008.

“The Chinese PMI and the German retail sales numbers are what started the ball rolling down and then personal income pushed it further,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We’ve had some pretty disappointing economic data.”

Crude oil for November delivery fell $2.94 to $79.20 a barrel on the New York Mercantile Exchange, the lowest settlement since Sept. 29, 2010. Futures dropped 11 percent this month, the biggest decline since May 2010, and lost 0.8 percent this week.

Brent oil for November settlement fell $1.19, or 1.1 percent, to settle at $102.76 a barrel on the ICE Futures Europe exchange in London. Prices are down 8.6 percent this quarter, 11 percent this month and 1.2 percent this week.

A gauge of manufacturing in China, the world’s fastest- growing oil consumer, shrank for a third month, the longest contraction since 2009. The reading of 49.9 for the September purchasing managers’ index, released by HSBC Holdings Plc and Markit Economics today, was unchanged from August and compared with a preliminary 49.4 figure published last week.

China is the world’s second-biggest oil user, trailing only the U.S.

Chinese Slowdown Risk

Consumer spending in the U.S. slowed in August as incomes unexpectedly dropped for the first time in almost two years, Commerce Department figures showed today in Washington. Purchases rose 0.2 percent after a 0.7 percent increase the prior month.

“There is a risk of slowdown in Chinese demand,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, who forecasts Brent prices at $100 in the next quarter. “The risks to the forecast in the fourth quarter and for 2012 as a whole are to the downside.”

German retail sales, adjusted for inflation and seasonal swings, slumped 2.9 percent from July, when they rose 0.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.5 percent decline, according to the median of 18 estimates in a Bloomberg survey.

Fuel Demand

“There are increasing signs that we are tipping into recession and that’s playing into a weaker demand outlook,” said John Kilduff, a partner at Again Capital LLC, a New York- based hedge fund that focuses on energy.

Total products supplied averaged over four weeks, a measure of fuel demand, fell 0.6 percent in the period ended Sept. 23 to 19 million barrels a day, the lowest level since July, the Energy Department reported this week.

Oil pared losses in intraday trading after the Institute for Supply Management-Chicago Inc. said today that its U.S. business barometer rose to 60.4 this month from 56.5 in August. Economists forecast the gauge would drop to 55, according to the median estimate in a Bloomberg News survey.

Oil may fall next week on concern that Europe’s economy is showing signs of a slowdown as governments struggle to contain their fiscal crisis and avert a Greek default, according to a Bloomberg News survey. Thirteen of 28 analysts, or 46 percent, forecast oil will decline through Oct. 7, while eight respondents, or 29 percent, predicted prices will increase.

Economic Outlook

“The underlying message is that the economy will remain weak in the long term,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “In the short term, the market is going to react on every headline out of Europe on the debt crisis and every bit of economic data here in the U.S.”

Greek Prime Minister George Papandreou met French President Nicolas Sarkozy today in Paris after seeing European Union President Herman Van Rompuy in Warsaw. Papandreou said after the talks that Greece was making sacrifices to uphold its commitments and thanked Sarkozy for his support. Next week European leaders will discuss a permanent rescue fund after German lawmakers approved an expansion of the temporary European Financial Stability Facility.

OPEC Output

The Organization of Petroleum Exporting Countries’ oil output in September rose to the highest level since November 2008, as a Saudi cut was outpaced by Iraqi and Libyan gains, a Bloomberg News survey showed. Production increased 75,000 barrels, or 0.3 percent, to average 30.055 million barrels a day, according to the survey of oil companies, producers and analysts.

The euro tumbled 1.5 percent to $1.3392 at 4:31 p.m. in New York. A weaker euro and stronger dollar curbs the appeal of commodities as an alternative investment. The European currency has tumbled 7.7 percent since the end of June, poised for the worst quarter since the period ended in June 2010.

Oil volume in electronic trading on the Nymex was 622,091 contracts as of 4:31 p.m. in New York. Volume totaled 591,868 contracts yesterday, 9.8 percent below the average of the past three months. Open interest was 1.4 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