December 28th, 2011

Crude oil futures declined for the first time in seven days as a surge in the European Central Bank’s balance sheet to a record highlighted the growing risks of the region’s debt crisis.

Crude oil futures dropped as much as 2.2 percent after the ECB lent financial institutions more money last week in an attempt to keep credit flowing. The euro tumbled to the lowest level since January against the dollar, curbing investor demand for commodities. Oil also decreased on reduced concern that Iran will block the Strait of Hormuz.

“The biggest news right now is that the euro is coming in pretty strongly,” said Tom Bentz, a director with BNP Paribas Prime Brokerage Inc. in New York. “It was time for a correction after rising for six days.”

Crude oil futures for February delivery declined $1.72, or 1.7 percent, to $99.62 a barrel at 1:18 p.m. on the New York Mercantile Exchange. Earlier, prices touched $99.11 a barrel. Futures have climbed 9 percent this year, extending last year’s advance of 15 percent.

Brent oil for February settlement fell $1.61, or 1.5 percent, to $107.66 a barrel on the London-based ICE Futures Europe exchange. The European contract’s premium to New York crude was $8.04 a barrel, up from yesterday’s close of $7.93, the smallest differential based on settlement prices since Jan. 20.

New York oil prices surged 1.7 percent to $101.34 yesterday, the highest settlement since Nov. 16, during a period of slow trading. Volume on the Nymex totaled 175,907 contracts as of 12:31 p.m. Volume was 216,467 yesterday, down 65 percent from the average of the past three months. Open interest was 1.33 million contracts.

Crude Oil ‘Exaggerated’ Move

“The significant rally yesterday was probably exaggerated because of low volume,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

Lending to euro-area banks jumped 214 billion euros ($280 billion) to 879 billion euros in the week ended Dec. 23, the Frankfurt-based ECB said in a statement today. Its balance sheet increased 239 billion euros to 2.73 trillion euros, it said.

The 17-nation currency fell against the dollar as concern increased that the region’s sovereign-debt crisis will reduce economic growth in the region. The euro decreased as much as 1.2 percent to $1.2912. The Standard & Poor’s 500 Index declined 1.2 percent to 1,250.05.

“We’re trying to balance the bullish and bearish influences in the market,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “All of the commentary about Iran has been supportive while the macroeconomic picture, as expressed by the S&P 500, is negative.”

Crude Oil: Strait of Hormuz

About 15.5 million barrels of oil a day, or a sixth of global consumption, pass through the Strait of Hormuz between Iran and Oman at the mouth of the Persian Gulf, according to the U.S. Energy Department. Iran’s navy started a 10-day exercise east of the passage that involved the use of submarines, ground- to-sea missile systems and torpedoes, Press TV said Dec. 24.

The U.S. won’t tolerate a disruption to shipping in the Strait of Hormuz, Rebecca Rebarich, a Navy spokeswoman, said in an e-mail.

“It’s important to remember that there’s a very low probability that Iran would attempt to block the Strait of Hormuz,” Evans said. “The likelihood of something occurring is much lower than 50-50.”

Gulf Arab countries are prepared to make up for any loss of Iranian oil from the world market, the Associated Press reported, citing an unidentified Saudi Arabian oil official.

Crude Oil: U.S. Supplies

U.S. oil inventories probably fell a third week, according to a Bloomberg News survey before tomorrow’s Energy Department report. Stockpiles declined 2.5 million barrels, according to the median estimate of eight analyst estimates.

Crude oil inventories fell in December in the past five years as refiners reduced stockpiles at the year end to minimize their taxes. Texas and Louisiana assess taxes based on the fair-market value of inventories on Jan. 1.

The department is scheduled to release its weekly report at 11 a.m. tomorrow in Washington, a day later than usual because of the Christmas holidays. The industry-funded American Petroleum Institute will release its supply data at 4:30 p.m. today in Washington.

- Mark Shenk in New York at Bloomberg.