Oil wipes out all of 2011's gains on signs recovery is stalling

Oil wipes out all of 2011's gains on signs recovery is stalling.

Just another cycle. Aivars Lode

Economic slowdown creates downward pressure on demand

August 4, 2011 3:25 pm ET

Oil fell to the lowest level in more than five months in New York, erasing 2011 gains amid growing evidence the U.S. economic recovery is stalling and sapping demand in the world's biggest consumer.

Futures dropped 5.8 percent as a U.S. government report showed limited improvement in the labor market. The Dollar Index gained as much as 1.5 percent, curbing commodities' appeal as an alternative investment, and the MSCI All-Country World Index of stocks slid 10 percent from the year's May high.

“What you're looking at here is concerns about what demand is going to be doing because of the economy,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “The result of all this could be slower growth and the result of slower growth is less oil demand.”

Crude for September delivery declined $5.30 to $86.63 a barrel on the New York Mercantile Exchange, the lowest settlement since Feb. 18. It was the biggest one-day drop since May 5. The contract has fallen 5.2 percent in 2011.

Brent for September settlement on the London-based ICE Futures Europe exchange fell $5.58, or 4.9 percent, to $107.65 a barrel at 2:31 p.m. in New York. For the year to date, Brent is up 14 percent. The European benchmark contract was at a $21.02 premium to U.S. futures, after reaching a record $22.67 on Aug. 2.

2011 Decline

Futures have tumbled 25 percent in New York since reaching a two-year intraday high of $114.83 a barrel on May 2 as European officials struggled to contain a debt crisis, U.S. lawmakers attempted to stave off a default and global economic growth showed signs of slowing.

U.S. gasoline demand, averaged over four weeks, slipped 23,000 barrels, or 0.3 percent, to 9.07 million barrels a day in the period ended July 29, its fourth consecutive decline and the lowest level since a report through May 27, the Energy Department reported yesterday.

Applications for jobless benefits decreased 1,000 in the week ended July 30 to 400,000, the fewest in almost four months, the Labor Department said in Washington. The four-week average also fell to the lowest level since April. Consumer confidence dropped to the lowest level in more than two months last week in the Bloomberg Consumer Comfort Index.

Slowing Growth

The U.S. economy grew at a 1.3 percent annual rate in the second quarter, the Commerce Department reported last week, less than the 1.8 percent median estimate of economists surveyed by Bloomberg News. The government also revised down its first- quarter estimate to 0.4 percent, less than the 1.9 percent previously indicated.

“With this continuous stream of poor economic data and the dollar really making impressive gains today, it's no wonder why the front-month contract is really under pressure,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

The Dollar Index, which tracks the U.S. currency against those of six trading partners, surged 1.5 percent to 75.140. The Standard & Poor's GSCI Total Return Index of 24 commodities tumbled 3.7 percent to 646.89. Twenty-one of the commodities dropped, led by silver, gasoline and crude oil.

The MSCI All-Country World Index of stocks in developed and emerging markets dropped 3.6 percent to 313.14, extending the decline from the near-three-year high on May 2 to 12 percent. The Standard & Poor's 500 Index fell 3.3 percent to 1,218.82, and the Dow Jones Industrial Average tumbled 345.39 points, or 2.9 percent, to 11,551.05.

Technical Support

Oil breached technical support at $89.84, the 50 percent retracement level on a Fibonacci study from the record $147.27 a barrel price set in intraday trading July 11, 2011, Armstrong said.

President Barack Obama signed a bill Aug. 1 that averted a debt default in the world's largest economy with one day to spare. In Europe, officials are trying to put a firewall around Italy and Spain, where bond yields have surged to euro-era records on concern that they will have to follow Greece, Ireland and Portugal in seeking bailouts.

“Even though the U.S. avoided a debt default, the specter of a potential systematic failure of the sovereign debt market has engendered a big drop in most markets,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas.

Prices also fell after crude stockpiles advanced for a second week in the seven days ended July 29, according to Energy Department data yesterday. U.S. inventories rose 950,000 barrels to 354.9 million barrels.

Oil volume in electronic trading on the Nymex was 857,518 contracts as of 2:35 p.m. in New York. Volume totaled 658,645 contracts yesterday. Open interest was 1.54 million contracts.

--Bloomberg News--