Crude Oil Falls as Stronger Dollar Curbs Appeal of Commodities

March 27 (Bloomberg) -- Crude oil in New York fell the most in two weeks as the dollar’s gain against the euro reduced the appeal of commodities to investors and stock markets declined.

Oil dropped 3.6 percent after the U.S. currency rebounded against the euro on evidence the recession is deepening in Europe. A stronger dollar makes commodities less attractive as an alternative investment. Falling commodity prices and a report showing the U.K. economy contracted more than previously estimated sent stocks lower.

“This correction is long overdue,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “We were up pretty much all week on the rising stock market and weak dollar. The fundamentals don’t support that kind of a move.”

Crude oil for May delivery fell $1.96 to settle at $52.38 a barrel at 2:51 p.m. on the New York Mercantile Exchange. The contract rose 0.6 percent this week. Prices are up 17 percent this year.

The Reuters/Jefferies CRB Index of 19 commodities fell as much as 5.42 points, or 2.4 percent, to 222.26, the biggest one- day drop since March 2.

The euro, which is used in 16 nations, fell the most against the dollar in more than a month after Europe’s statistics office said industrial orders in the region plunged in January. The currency declined as much as 2 percent to $1.3257, the biggest intraday drop since Feb. 17, and was at $1.3301 at 2:55 p.m. in New York.

The Standard & Poor’s 500 Index declined 2 percent to 815.94. The gauge is up 11 percent in March. The Dow Jones Industrial Average fell 148.38, or 1.9 percent, to 7,776.18.

Vulnerable Market

Goldman Sachs Group Inc. said oil’s rally is vulnerable to a correction because near-term demand remains constrained. The discount for crude delivered in May, the front-month contract in New York, compared with July futures widened to as much as $3.47 a barrel this week from $1.18 earlier in the month That indicates a surplus of oil for immediate delivery. U.S. oil inventories rose to a 16-year high last week.

“The current rally was accompanied by weakened time- spreads and weaker fundamentals,” Jeffrey Currie, a London- based analyst at Goldman, said in the bank’s Energy Weekly yesterday. “This leaves the market vulnerable to near-term pullback.”

U.S. oil supplies rose 3.3 million barrels to 356.6 million last week, the highest since July 1993, an Energy Department report on March 25 showed. It was the 22nd gain in 26 weeks and left stockpiles 13 percent higher than the five-year average for the period.

Lower Demand

Daily fuel demand averaged over the past four weeks was 19.1 million barrels, down 3.2 percent from a year earlier, according to the department.

“The recession isn’t over by a long shot,” said Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York. “There’s a huge inventory surplus.”

The 11 members of the Organization of Petroleum Exporting Countries bound by quotas will cut supplies by 0.2 percent this month as the group stalls in completing record production constraints, according to preliminary estimates from consultant PetroLogistics Ltd.

Oil supply from the 11 members with quotas will average 25.9 million barrels a day in March, down from 25.95 million barrels a day in February, Conrad Gerber, the founder of PetroLogistics, said today. Members have a production target of 24.845 million barrels a day. Iraq has no quota.

OPEC Production

The reduction means that OPEC has completed 75 percent of the 4.2 million barrels a day of production cuts announced last year. At its latest meeting on March 15, the group resolved to meet its existing output targets and defer any further action to another gathering on May 28.

Brent crude oil for May settlement fell $1.48, or 2.8 percent, to end the session at $51.98 a barrel on London’s ICE Futures Europe exchange.

Oil may decline next week on speculation that U.S. oil and fuel inventories will increase because the recession has curbed demand and as the stock market rally loses steam.

Sixteen of 30 analysts surveyed by Bloomberg News, or 53 percent, said futures will fall through April 3, the most bearish response since November. Nine respondents, or 30 percent, forecast oil prices will increase and five said that there will be little change.

Crude oil volume in electronic trading on the Nymex was 279,043 contracts as of 3:05 p.m. in New York. Volume totaled 340,448 contracts yesterday, the lowest since Jan. 2, and 38 percent lower than the average over the past three months.

Open interest yesterday was 1.16 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

Fuel Prices

Gasoline and heating oil followed crude oil lower. Gasoline futures for April delivery fell 4.32 cents, or 2.8 percent, to end the session at $1.4879 a gallon in New York. Heating oil for April delivery declined 4.85 cents, or 3.3 percent, to settle $1.4328 a gallon.

Regular gasoline at the pump, averaged nationwide, rose 1.7 cents to $2.026 a gallon, AAA, the nation’s biggest motoring organization, said today on its Web site. It’s the highest retail price since November.