Crude Oil Falls After Reports Raise Concern U.S. Economic Recovery to Slow

Jul 15, 2010 - Crude oil tumbled after government reports bolstered concern that the U.S. economic recovery will slow, reducing fuel consumption.

Oil dipped 0.6 percent after the Federal Reserve said that U.S. factory output fell 0.4 percent in June, the biggest decline in a year. Other reports showed factories pulled back in the New York and Philadelphia regions in July. The major stock indexes dropped at least 1.2 percent before rebounding after oil settled to close little changed.

“There’s nothing good in today’s economic reports that you can point to,” said Michael Fitzpatrick, vice president of energy at MF Global in New York. “Oil is overpriced given where the economy is.”

Crude for August delivery dropped 42 cents to settle at $76.62 a barrel on the New York Mercantile Exchange. The contract dropped as low as $75.33 during the session. The price is up 25 percent from a year ago.

The Dow Jones Industrial Average declined 7.41 points to 10,359.31 at 4:01 p.m. in New York, the first drop in eight days. The Standard & Poor’s 500 Index gained 0.1 percent to 1,096.48 after trading below the previous close most of the day.

Oil in New York has traded in a range of $8.29 for the past month, from $71.09 to $79.38 a barrel. The August contract’s discount to the December contract is $1.83, down from $3.21 on June 18.

“Until we see solid economic growth, prices will stay in this range,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at MFC Global Investment Management in Boston. “The forward curve has come down a lot, which is a sign that people are less optimistic about the economy and demand growth.”

New York Index

The Federal Reserve Bank of New York reported that showed its general economic index fell to 5.1 in July from 19.6 the prior month. The Federal Reserve Bank of Philadelphia’s general economic index declined to 5.1 this month, the lowest level since August 2009, from 8 in June.

Economists monitor the New York and Philadelphia Fed factory reports for clues about the Institute for Supply Management figures on U.S. manufacturing during the month. The July ISM data will be released Aug. 2.

China’s economic growth rate eased to 10.3 percent in the second quarter. The gain in gross domestic product was less than an 11.9 percent increase in January-March from a year earlier. Industrial output rose 13.7 percent, less than all but one of 27 forecasts in a Bloomberg News survey.

“Their economy is clearly decelerating, which has to worry investors,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

The U.S. and China, the world’s biggest energy consuming countries, accounted for 32 percent of global oil demand in 2009, according to BP Plc, which publishes its BP Statistical Review of World Energy each June.

OPEC Shipments

The Organization of Petroleum Exporting Countries, supplier of about 40 percent of the world’s oil, will ship 23.6 million barrels a day in the four weeks to July 31, compared with 23.58 million in the month ended July 3, according to tanker tracker Oil Movements. The data exclude Ecuador and Angola.

OPEC’s compliance with production targets slipped in June on higher production from Saudi Arabia and Nigeria. The 11 members bound by quotas increased output by 61,700 barrels a day to 26.86 million, implying compliance of 52 percent, according to the group’s Monthly Oil Market Report today. OPEC completed 54 percent of its promised cuts in May, the data show.

An Energy Department report yesterday showed that stockpiles of gasoline and distillate fuel, a category that includes heating oil and diesel, increased last week as crude oil supplies dropped. Both crude and fuel stockpiles were above the five-year average for the period.

‘A Lot of Crude’

“We still have a lot of crude on hand,” said Kyle Cooper, a managing director at energy consultant IAF Advisors in Houston. “What we need are products such as gasoline, and those supplies increased.”

Gasoline for August delivery slipped 0.58 cent, or 0.3 percent, to settle at $2.0607 a gallon in New York. Heating oil for August delivery declined 1.78 cents, or 0.9 percent, to end the session at $2.0183 a gallon.

Brent crude for August settlement fell 58 cents, or 0.8 percent, to end the session at $76.19 a barrel on the London- based ICE Futures Europe exchange. The August contract expired today. The more actively traded September contract dropped 57 cents, or 0.7 percent, to $76.09.

Oil volume on the Nymex was 588,338 contracts as of 3:09 p.m. in electronic trading in New York. Volume totaled 683,617 contracts yesterday, 8.2 percent below the average of the past three months. Open interest was 1.28 million contracts.