BLBG:Crude Declines to Five-Day Low Before Merkel, Sarkozy Meet to Revive Euro
Oil fell to its lowest level in five days, erasing earlier gains before German and French leaders meet in an attempt to revive growth in the euro region.
West Texas Intermediate futures in New York were down 0.7 percent before German Chancellor Angela Merkel and French President Nicolas Sarkozy try to tighten budget rules for European governments. Oil earlier rose as much as 0.6 percent after the U.S. Joint Chiefs of Staff chairman General Martin Dempsey said Iran is able block the strait of Hormuz for a period of time. Nigerian oil production was threatened by pipeline thefts and oil worker strike.
“There is also a little nervousness ahead of the start of U.S. earnings season later today,” said Michael Hewson, a market analyst at CMC Market in London. “This has translated into a slightly weaker oil price.”
Crude for February delivery fell as much as 73 cents to $100.83 a barrel in electronic trading on the New York Mercantile Exchange after rising to $102.15 earlier today. It was at $100.93 at 11:23 a.m. London time. The contract fell as low as $99.65 on Jan. 3.
Brent oil for February settlement was at $112.71 a barrel, down 35 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to New York crude was at $11.78, the highest gap based on closing prices in almost two months.
Berlin Meeting
Merkel and Sarkozy will meet in Berlin to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence. Spanish 10-year yields rose by the most in almost 17 years last week.
“All eyes will be on today’s meeting between German Chancellor Merkel and French President Sarkozy, aimed at forging plans to revive economic growth in euro-zone member states,” analysts at JBC Energy GmbH said in a note today.
German industrial output declined in November as factories in Europe’s largest economy produced fewer investment and consumer goods.
Production fell 0.6 percent from October, when it rose 0.8 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.5 percent drop, according to the median of 30 estimates in a Bloomberg News survey. In the year, production rose 3.6 percent when adjusted for working days.
“Geopolitical risks will continue to dictate price action, but fundamentals remain bearish,” said Hussein Allidina, Morgan Stanley’s head of commodities research in New York, said in a report dated yesterday. “The deterioration in fundamentals should accelerate as we move into seasonally weaker demand in the months ahead.”
Strait of Hormuz
Iran has the ability to block the Strait of Hormuz “for a period of time,” and the U.S. would take action to reopen it, Martin Dempsey said in an interview aired yesterday on the CBS “Face the Nation” program.
“They’ve invested in capabilities that could, in fact, for a period of time block the Strait of Hormuz,” Dempsey said. “We’ve invested in capabilities to ensure that if that happens, we can defeat that.”
A halt of shipping through the strait could send the price of Brent as high as $200 a barrel for a limited period, according to Societe Generale SA.
“A credible threat from missiles, mines, or fast attack boats is all that it would take for tanker insurers to stop coverage, which would halt tanker traffic,” Mike Wittner, the bank’s head of oil market research in New York, said in a report. “We estimate that the probability of this very high impact event at 5 percent.”
A pipeline that would allow oil from the United Arab Emirates to bypass the Strait of Hormuz separating it from Iran has been delayed because of construction difficulties, two people with knowledge of the matter said.
Nigerian Disruption
As many as 270 construction issues have pushed back the completion date, said the two people, declining to be identified because they’re not allowed to speak publicly on the matter. The $3.3 billion project won’t be ready until at least April, one of them said. Abu Dhabi, holder of most of the U.A.E.’s oil reserves, had planned to start exports in January 2011 through the pipeline to a port outside the strait, Dieter Blauberg, the project’s former director, said in May 2009.
Brent oil’s premium to WTI has risen for eight consecutive days as Nigerian production outages and strikes threaten to reduce supplies of light, sweet crude.
“While much of the Iranian geopolitical issues are reflected in Brent currently, very recent news of supply disruptions to Nigerian production is supportive of Brent, given loss of production is of similar quality to light, sweet Brent,” said Gareth Lewis-Davies, an oil strategist at BNP Paribas in London.
Oil Worker Strike
Royal Dutch Shell Plc declared force majeure, a legal clause that allows companies to miss deliveries because of circumstances beyond their control, on exports of benchmark Bonny Light crude in Nigeria on Jan. 5 following earlier pipeline leaks caused by oil theft. Strikes by Nigerian oil workers scheduled today risk further cutting output from Africa’s biggest producer. Brent’s premium rose to a record $27.88 on Oct. 14 as the uprising in Libya curbed that nation’s production.
Hedge funds increased bullish positions on oil by 4.1 percent in the week ended Jan. 3, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Open interest advanced 3.5 percent, rising for a second week after falling in December to the lowest since May 2007, according to the CFTC.
To contact the reporters on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net; Sherry Su in London at lsu23@bloomberg.net
To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net; Stephen Voss at sev@bloomberg.net
