Oil Drops on Concern U.S. Unemployment Will Erode Fuel Demand

April 3 (Bloomberg) -- Crude oil dropped after a report showed the U.S. jobless rate at a 25-year high, adding to concern fuel demand will slide further.

Oil fell as much as 3.1 percent after the Labor Department said the economy lost more than 650,000 jobs for a fourth consecutive month. Total daily fuel demand averaged over the past four weeks reached the lowest since October, the Energy Department said April 1.

“If the turnaround in the economy isn’t going to happen as soon as people had hoped, then oil remains under pressure, and we’ll start testing the lows from the beginning of the year, back below $35,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

Crude oil for May delivery fell 13 cents, or 0.3 percent, to settle at $52.51 a barrel at 2:49 p.m. on the New York Mercantile Exchange. Oil has risen 13 cents this week, for a seventh consecutive gain. That’s the longest stretch of increases since July 2007. Prices are up 18 percent this year.

Crude rose 8.8 percent yesterday, driven by the Group of 20 plan to foster global economic recovery. It touched $32.70 in intraday trading on Jan. 20.

Unemployment jumped to 8.5 percent from 8.1 percent in February, the Labor Department said today. Employers cut 663,000 workers, bringing total losses since the recession began to 5 million, the biggest slump since World War II.

Service industries in the U.S. unexpectedly contracted in March at a faster pace as unemployment climbed and consumer confidence held near a record low, according to the Institute for Supply Management’s index of non-manufacturing businesses.

Recession Reminder

“It’s a poignant reminder that we’re still in the midst of a recession,” Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts, said of the unemployment report. Yesterday’s rally was “a brief spurt of irrational exuberance, and now we’re seeing the hangover, people selling after the big rise.”

Total daily fuel demand was 18.9 million barrels in the four weeks ended March 27, down 4.4 percent from a year earlier, according to the Energy Department.

The International Energy Agency is likely to trim its demand forecast in its next monthly report on April 10 because of declining global economic growth projections, Executive Director Nobuo Tanaka said yesterday in an interview with Bloomberg Television.

“Until we get demand, you are going to continue to see supply build,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, in a Bloomberg Television interview. “That is what we are seeing right now. We are literally swimming in oil. Not just oil, but also distillate fuel, also gasoline.”

Gasoline Rallies

Gasoline futures for May delivery rose 2.26 cents, or 1.5 percent, to settle at $1.4924 a gallon in New York on speculation that demand will rise as the summer driving season approaches. The season extends from the U.S. Memorial Day holiday in late May until Labor Day in early September.

Gasoline stockpiles were 3.5 percent below year-ago levels in the week ended March 27, according to the Energy Department.

“Gasoline inventories are still pretty small,” Strategic Energy’s Lynch said. “We’re still seven weeks from the driving season, but if you’re a bull, it’s the kind of thing you look for.”

Saudi Pricing

Lower demand by refiners is prompting some sellers to reduce prices.

Saudi Arabia may lower prices for crude oil sold to Asia for the first time in four months as processing profits declined, refinery officials said. Saudi Arabian Oil Co., the world’s largest oil producer, may cut its Arab Heavy and Arab Medium oil grades, according to a survey of refiners in Taiwan, Singapore, Japan and China. Saudi Aramco, as the company is also known, is expected to provide prices next week.

Brent crude oil for May settlement climbed 72 cents, or 1.4 percent, to $53.47 a barrel on London’s ICE Futures Europe exchange.

The Brent contract has risen 10 percent in the past two days and is now 96 cents a barrel more expensive than May crude traded on the Nymex, the most since Feb. 24. Brent oil is historically priced at a discount to Nymex crude and traded lower for the four weeks until April 1.

Rig Count Rises

The number of oil rigs operating in the U.S. rose for a second week, according to data published by Baker Hughes Inc. today. The count increased by 7, or 3.2 percent, to 224 in the week ended today. The oil rig count reached 215, the lowest since Feb. 17, 2006, in the week ended March 20. It’s down from a peak of 442 on Nov. 7.

Oil rose 11 percent in the first quarter after tumbling 56 percent in the previous three months.

Crude oil may trade between $47 and $53 a barrel in New York next week as U.S. stockpiles increase and OPEC members reduce production to bolster prices, according to a Bloomberg News survey of analysts.

Sixteen of 33 respondents, or 48 percent, said futures will be little changed through April 9. Twelve, or 36 percent, forecast that oil will decline and five analysts said there will be an increase. Last week, 53 percent of analysts expected prices to decline.

Crude oil volume in electronic trading on the Nymex was 373,028 contracts as of 2:57 p.m. in New York. Volume totaled 514,788 contracts yesterday, 7.6 percent lower than the average over the past three months. Open interest was 1.16 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.