Crude Oil Falls to 3-Week Low on Skepticism About Bank Rescue

Feb. 10 (Bloomberg) -- Crude oil fell to a three-week low on skepticism that the U.S. government’s bank rescue plan will revive the economy.

Oil dropped as much as 5.6 percent after Treasury Secretary Timothy Geithner said he is “exploring a range of different structures” to bail out lenders. A U.S. government report tomorrow is forecast to show that crude oil stockpiles increased 2.75 million barrels last week, according to the median of 14 analyst estimates in a Bloomberg News survey.

“All the markets are reacting to the Geithner comments with skepticism,” said Michael Fitzpatrick, vice president for energy at MF Global Ltd. in New York. “Stocks dropped and oil followed. Everybody expects tomorrow’s report to show that inventories rose yet again.”

Crude oil for March delivery fell $2.01, or 5.1 percent, to $37.55 a barrel at 2:57 p.m. on the New York Mercantile Exchange, the lowest settlement since Jan. 16. It was the biggest decline since Jan. 27. Prices gained as much as $2.24, or 5.7 percent, before Geithner spoke. Oil is down 16 percent this year and has declined 60 percent from a year ago.

Geithner pledged government financing for programs aimed at spurring new lending and addressing banks’ toxic assets, an effort that may grow to as much as $2 trillion.

The Standard & Poor’s 500 Index dropped 4.9 percent to 827.16 and lost as much as 5.4 percent, the most since Jan. 20.

A Millstone

“The credit crisis is a millstone weighing on this market,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “There was some hope that Geithner would say something to make the worries go away, but that obviously didn’t happen.”

The U.S. Senate approved an $838 billion economic stimulus package, clearing the way for negotiations with the House over a compromise plan lawmakers said they want to send to President Barack Obama quickly.

“It’s become clear that nobody knows what’s going to work to get us out of this mess,” Fitzpatrick said.

The price of oil for delivery in April is $6.21 a barrel higher than the March contract. December futures are up $16.20 from the front month. This structure, in which the future month’s price is higher than the one before it, is known as contango, and is often an indicator of oversupply.

“There’s a battle between the short-term and longer-term outlook,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “The front months aren’t going to get much higher because the short-term outlook is so bleak.”

Gasoline Supplies

Gasoline stockpiles rose 500,000 barrels from 220.2 million in the week ended Feb. 6, according to the Bloomberg News survey. The Energy Department is scheduled to release its weekly inventory report tomorrow at 10:30 a.m. in Washington.

Gasoline futures for March delivery declined 0.32 cent, or 0.3 percent, to settle at $1.2439 a gallon in New York. Heating oil dropped 5.09 cents, or 3.8 percent, to end the session at $1.3014.

The industry-funded American Petroleum Institute reported that U.S. supplies declined 2 million barrels to 344.3 million last week. The API published its weekly report on oil inventories at 4:30 p.m. in Washington today.

Kuwait will monitor oil market conditions before deciding whether to support a reduction in supply by the Organization of Petroleum Exporting Countries when ministers meet in Vienna on March 15, newly appointed Oil Minister Sheikh Ahmed al-Abdullah al-Sabah told reporters in parliament today.

Brent crude oil for March settlement fell $1.41, or 3.1 percent, to end the session at $44.61 a barrel on London’s ICE Futures Europe exchange. Brent futures closed at a $7.06 premium to West Texas Intermediate, the grade that’s traded in New York.

Bad News

“We continue to be caught between bad economic news and weak oil demand and OPEC production cuts,” said Mike Wittner, head of oil research at Societe Generale SA in London. Prices have “been in a range for the better part of six weeks.”

Global oil demand will average 84.7 million barrels a day this year, down 1.17 million barrels from 2008, the U.S. Energy Department said in a report today.

Recessions in the world’s largest economies will last for years, dragging down crude-oil demand and prices, BP Plc Chief Executive Officer Tony Hayward said today. China and India will lead the recovery in energy consumption, Hayward said in a presentation at a Houston energy conference sponsored by Cambridge Energy Research Associates.

“I believe over the next few years we will see economic growth recover, driven by continued industrialization in China and India and the emergence first of America and then of Europe,” Hayward said.

Volume in electronic trading on the exchange was 622,443 contracts as of 3:13 p.m. in New York. Volume totaled 655,316 contracts yesterday, 30 percent higher than the average over the past three months. Open interest yesterday was 1.23 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.