September 20th, 2011

Crude oil futures traded near the lowest price in three weeks in New York after Standard & Poor’s cut Italy’s credit rating, stoking concern that demand for fuel will falter as Europe’s debt crisis worsens.

Crude oil futures fell as much as 0.7 percent after sliding 2.6 percent yesterday. Italy’s credit rating was reduced one level by Standard & Poor’s on concern that weakening economic growth and a “fragile” government mean the nation won’t be able to reduce the euro region’s second-largest debt burden. Fiscal troubles in Europe and high unemployment in the U.S. are curbing growth in global oil-demand, OPEC Secretary-General Abdalla El- Badri said yesterday in Dubai.

“The downgrade further cements the demand destruction,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney. “It’s very tough for crude going anywhere near $90 a barrel.”

Crude oil futures for October delivery dropped as much as 59 cents and was at $85.60 a barrel at 2:05 p.m. Singapore time in electronic trading on the New York Mercantile Exchange. It fell $2.26 to $85.70 a barrel yesterday, the lowest settlement since Aug. 26. The contract will expire today. The more actively traded November future was at $85.81 a barrel. New York oil has dropped 6.5 percent this year.

Brent crude for November settlement was at $109.10 a barrel, down 4 cents, on the London-based ICE Futures Europe Exchange. The contract yesterday fell 2.7 percent to $109.14 a barrel. The European benchmark future was at a premium of $23.60 to the November price of West Texas Intermediate, compared with a record settlement of $26.87 on Sept. 6.

Saudi Output

Oil prices are unlikely to rise from current levels by year end, El-Badri told Bloomberg Television yesterday.

Saudi Arabia, the world’s largest oil exporter, cut exports and increased inventories in July, a sign that demand worldwide may be slowing. The kingdom pumped 9.6 million barrels a day, down 2 percent from June, the Joint Organization Data Initiative reported Sept. 18. The output was lower than earlier estimates by the Organization of Petroleum Exporting Countries and the International Energy Agency.

The nation had 239.8 million barrels of oil in storage within its territory in July, compared with 236.5 million barrels in June, according to JODI’s website. The association is supervised by the Riyadh-based International Energy Forum and compiles data supplied by member governments.

Technical Analysis

Crude oil in New York is no longer in the upward-sloping trend that was in place for the past six weeks, according to data compiled by Bloomberg. The bottom of the so-called channel for crude is about $87.42 a barrel today. Investors tend to sell contracts when prices breach technical-support levels.

“We could see the commencement of a move that can see crude back down at $80 a barrel, if not lower,” Barratt said. “That upward trend channel was tested and finally broke.”

Crude oil futures rose as much as 0.5 percent earlier today as investors speculated that U.S. prices fell too far amid shrinking stockpiles in the world’s biggest crude consumer.

U.S. crude oil supplies probably declined to an eight-month low last week as refineries cut deliveries with the start of a maintenance cycle, a Bloomberg News survey showed. Stockpiles fell 1.5 million barrels, or 0.4 percent, to 344.9 million in the seven days ended Sept. 16, according to the median of nine analyst estimates before a weekly Energy Department report tomorrow.

Winter Demand

“Winter may bring increasing demand for crude oil and fuel oil,” said Ken Hasegawa, a commodity-derivatives sales manager at Newedge Group in Tokyo, who expects oil to trade between $83 to $90 a barrel in the short term. “The main driver of financial and commodity markets is the European situation, which will be watched.”

Greece will talk today with its main creditors after a “productive” round of discussions in a teleconference with International Monetary Fund and European Union officials yesterday aimed at staving off default, the Athens-based finance ministry said in an e-mailed statement.

The European Union and the U.S. accounted for 38 percent of global oil demand last year, according to BP Plc’s annual Statistical Review of World Energy.

- Ann Koh Bloomberg.