Oil Drops on Unexpected Inventory Increase, European Crisis [ZT]

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Oil Drops on Unexpected Inventory Increase, European Crisis

QBy Moming Zhou - Jan 5, 2012 3:58 PM ET

Oil fell for the first time in three days as U.S. inventories gained and borrowing costs in France rose, adding to concern that Europe will struggle to contain the debt crisis.

Oil dropped 1.4 percent, slipping $1.49 in the last 40 minutes of floor trading, after the Energy Department said supplies (DOESCRUD) rose 2.21 million barrels last week. Futures ended above $100 for a third day on concern that sanctions against Iran will curb supplies.

“This was clearly a bearish report and this shows the U.S. market is very well supplied,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “If we don’t trend lower on data like these, it is because the market is largely focused elsewhere, issues like Iran.”

Crude for February delivery fell $1.41, or 1.4 percent, to $101.81 a barrel on the New York Mercantile Exchange. Prices have gained 28 percent in three months.

Brent oil for February lost 96 cents, or 0.8 percent, to settle at $112.74 a barrel on the London-based ICE Futures Europe exchange.

Oil stockpiles (DOESCRUD) increased to 329.7 million barrels, the Energy Department report showed. Analysts surveyed by Bloomberg expected a decline of 1 million barrels. Total petroleum demand (DOEDTPRD) fell 2.6 percent to 18 million barrels a day. Inventories at Cushing (DOESCROK), Oklahoma, the delivery point for futures traded on the Nymex, dropped to 29.3 million barrels, a two-year low.

Gasoline inventories (DOESTMGS) rose 2.48 million barrels to 220.2 million. Distillate fuels (DOESDIST), which include diesel and heating oil, gained 3.22 million to 143.6 million. Gains of 1 million barrels were expected for both.

Euro Declines
The euro weakened as European borrowing costs increased and Greece said income cuts are needed to avoid default. French 10- year bond yields rose to 3.29 percent from 3.18 percent on Dec. 1. Hungary’s one-year bill yield climbed to the highest level since 2009.

Greek Prime Minister Lucas Papademos said deeper income cuts are the only way for the country to keep the euro and avert economic collapse, adding to concern that the European crisis will persist.

The euro dropped (EURUSD) as much as 1.3 percent to $1.2777, the lowest level since September 2010. A weaker euro and stronger dollar reduce the appeal of investing in oil.

The 27 European Union member states accounted for 16 percent of global oil consumption last year, based on BP Plc’s Statistical Review of World Energy. The U.S. used 21 percent.

Iran Sanctions

The European Union countries aim to announce harsher sanctions on Iran’s energy and banking industries at their next meeting on Jan. 30, Michael Mann, an EU spokesman, said in Brussels yesterday.

French Foreign Minister Alain Juppe said yesterday he hopes Europe will decide to embargo Iranian oil as part of sanctions against the country’s nuclear program. Iran has threatened to block the Strait of Hormuz, through which almost 20 percent of the world’s oil flows out of the Persian Gulf, if its exports are restricted.

“The prospect of sanctions is having an effect already on the outright price,” said Alexander Poegl, an analyst at JBC Energy GmbH in Vienna. “Europe made it clear in November that they’re quite advanced with the proposals.”

Italian Prime Minister Mario Monti questioned the scope and timing of a possible EU halt to Iranian oil purchases. Penalties should be phased in and exempt crude sold by Iran to pay off debts to Eni SpA (ENI), Italy’s largest oil company, Monti told France’s Le Figaro in an interview published today.

Oil volume in electronic trading on the Nymex was 518,463 contracts as of 3:22 p.m. in New York. Volume totaled 604,724 yesterday versus the three-month average of 609,000. Open interest was 1.39 million contracts, the highest level since Nov. 11.

To contact the reporters on this story: Moming Zhou in New York at Mzhou29@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net