Oil Declines on Swine Flu Outbreak, Signs Economy Will Shrink

April 28 (Bloomberg) -- Crude oil fell for a second day on concern that the swine-flu outbreak will curtail travel and on forecasts that the U.S. economy will keep shrinking.

Oil declined as the World Health Organization weighed whether to raise its pandemic alert to an unprecedented level. The economy in the U.S., the world’s largest oil-consuming country, will continue to contract “for some time,” Lawrence Summers, director of the White House National Economic Council, said earlier this week.

“If swine flu continues to expand, it will impact fuel demand,” said Chip Hodge, who oversees a $9 billion natural- resource-company bond portfolio as managing director at MFC Global Investment Management in Boston. “It’s a demand story, not a supply story, because supply has been plentiful. Prices will drop any time there’s a sign of a further drop in demand.”

Crude oil for June delivery fell 29 cents to $49.85 a barrel at 9:02 a.m. Sydney time on the New York Mercantile Exchange. Prices are up 12 percent this year. Crude futures fell $1.41 to settle at $50.14 a barrel yesterday.

WHO plans to say that swine flu is spreading across North America, two people familiar with the agency said. An increase above level 3 on the agency’s six-step alert system would be the first since the current pandemic risk scale was adopted in 2005. Geneva-based organization is the United Nations body that coordinates international public health.

“It would be bad for the economy if the swine flu were to impact the travel and tourism sectors,” said Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York. “There’s been an overreaction to the outbreak.”

Stocks Retreat

U.S. stocks also retreated on concern the swine-flu outbreak will curb travel. The Standard & Poor’s 500 Index declined 1.01 percent to 857.51. The Dow Jones Industrial Average dropped 0.6 percent to 8,025.

Airline stocks tumbled worldwide. U.S. carriers reported some cases of suspected flu-like symptoms to health authorities, the Air Transport Association trade group said. The U.S. Centers for Disease Control and Prevention recommended that nonessential travel to Mexico be avoided.

The global economy will shrink 1.3 percent this year compared with a January prediction of 0.5 percent growth, according to an International Monetary Fund forecast on April 22. The Washington-based lender predicted expansion of 1.9 percent next year instead of its earlier 3 percent estimate.

“A flu outbreak is the last thing that the global economy needs,” said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis. “This is probably not a big deal, but there’s always a chance it will be and nobody wants to take that chance.”

Dollar Strength

The dollar increased against the euro for the first time in a week on speculation the European Central Bank will lower interest rates at its meeting next month. The U.S. currency traded 1.7 percent higher at $1.3012 per euro, limiting the appeal of dollar-priced commodities like crude oil as an alternative investment.

U.S. crude-oil stockpiles rose 3.86 million barrels to 370.6 million in the week ended April 17, the highest since September 1990, an Energy Department report showed last week. Supplies probably increased 1.8 million barrels last week, according to the median of nine analyst responses in a Bloomberg News survey.

“It’s funny that we’ve been swimming in oil for months and ignored the fact, but are reacting to this,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “Swine flu may take away a little bit more demand.”

Oversupplied Market

Increased output by non-OPEC producers has left the market oversupplied by about 720,000 barrels a day, Algerian Oil Minister Chakib Khelil said earlier this week.

Crude-oil prices need to be at $70 a barrel to ensure continued investment in the industry, Abdalla el-Badri, secretary-general of the Organization of Petroleum Exporting Countries, said in Algiers earlier this week. Oil may reach $60 a barrel by the end of 2009, Khelil said.

OPEC agreed last year to cut output by 4.2 million barrels and will review production again when it meets May 28. The group has completed about 83 percent of the reductions, the organization’s data show. former oil minister, said in Cairo earlier this week.

Brent crude for June settlement fell $1.35, or 2.6 percent, to end yesterday’s session at $50.32 a barrel on London’s ICE Futures Europe exchange.