Crude Drops Fifth Time in Six Days on European Debt Concern

Oil dropped for the fifth time in six days as discord among European leaders on when to introduce a banking union renewed concern that the region’s debt crisis will reduce oil demand. Prices fell as much as 1.8 percent after German Chancellor Angela Merkel and French President Francois Hollande disagreed over closer integration of Europe’s banking system at the weekend. The euro dropped against the dollar as German business confidence unexpectedly fell to the lowest level in more than two years in September. “The news out of Europe is not good and the dollar is stronger, and the combination is putting pressure on oil demand expectations,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It’s making people thinking that even $90 for oil is a little too high.” Oil for November delivery declined $1.16, or 1.2 percent, to $91.73 a barrel at 9:23 a.m. on the New York Mercantile Exchange. Prices are down 7.2 percent this year. Brent oil for November settlement decreased $1.43, or 1.3 percent, to $109.99 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade’s premium to West Texas Intermediate narrowed for the first time in three days. In speeches marking Franco-German reconciliation after World War II, German Chancellor Angela Merkel rejected French President Francois Hollande’s appeal to activate oversight of the banking union “the earlier, the better.” Deadlock over regulation may delay a key building block in resolving the single currency’s debt crisis.

German Doubts

German Finance Minister Wolfgang Schaeuble led criticism of the euro region’s rush toward common bank oversight at a meeting of European Union finance ministers in Cyprus this month. Germany has raised doubts about plans backed by France, Spain and Italy to hand the European Central Bank oversight powers over all banks in the euro area, and to do so by Jan. 1. “The market wants to see proof that Europe is climbing out of the doldrums,” said Jonathan Barratt, the chief executive officer of Barratt’s Bulletin, a commodity newsletter in Sydney. “The market has become a lot more pessimistic.” The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped for a fifth straight month to 101.4 this month from 102.3 in August. That’s the lowest reading since February 2010. Economists predicted an increase to 102.5, according to a Bloomberg survey. The euro fell as much as 0.7 percent to $1.2891. A weaker euro and stronger dollar reduce oil’s appeal as an investment alternative.

Stimulus Plans

Oil rose above $100 this month for the first time since May amid speculation European steps to tame the crisis and monetary easing by central banks would boost the global economy. The European Central Bank said Sept. 6 it would purchase bonds while the U.S. Federal Reserve said Sept. 14 it would start buying mortgage securities. “The market has largely digested the implications of the new stimulus programs,” said Mike Fitzpatrick, editor of the Energy Overview newsletter in New York and previously an oil trader at MF Global. The negative economic data will “focus participants’ glare on their lack of success, to date.” Prices may fall below $90 this week, he said in a note to clients.

Courtesy: Bloomberg