Crude Declines on Stockpile Release Speculation, China

Oil fell to a one-week low after manufacturing in the euro area and China contracted this month, signaling that fuel consumption may decline.

Futures dropped 1.8 percent as services and output slipped more than forecast in Europe, according to London-based Markit Economics. A preliminary measure of Chinese industrial activity also decreased. Crude's decline accelerated as equities retreated and the dollar climbed against the euro.

"The European and Chinese manufacturing data is weighing mightily on prices," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "These are significant signs of slowing. The market is keying off of economic signals right now."

Crude oil for May delivery fell $1.92 to $105.35 a barrel on the New York Mercantile Exchange, the lowest settlement since March 15. Futures are 6.6 percent higher this year.
Brent oil for May settlement declined $1.06, or 0.9 percent, to end the session at $123.14 a barrel on the London- based ICE Futures Europe exchange. The European benchmark contract's premium to New York-traded crude widened to $17.79. The spread reached a record $27.88 on Oct. 14.

A euro-area composite index based on a survey of purchasing managers dropped to 48.7 from 49.3 in February, Markit Economics said in an initial estimate today. Economists forecast a gain to 49.6, according to the median of 21 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

The preliminary index of Chinese manufacturing slid to 48.1 for March, the lowest level since November, and compares with a final 49.6 in February, according to HSBC Holdings Plc and Markit Economics.

Bullish Case

"The bullish case for oil has been built in large part on the prospect of Chinese growth continuing to speed ahead," said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.3 billion.

The European Union's 27 members accounted for 16 percent of global oil demand in 2010, according to BP Plc (BP/)'s Statistical Review of World Energy, released on June 8. China, the world's biggest oil-consuming country after the U.S., was responsible for 11 percent of global crude use, BP figures show.

"The manufacturing picture in China and Europe isn't supportive for oil demand or prices," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. "Unless there is some unforeseen political event, prices are probably heading lower."

Equities Drop

The Standard & Poor's 500 Index fell as much as 1 percent. The dollar strengthened 0.3 percent versus the euro. A stronger U.S. currency reduces the appeal of commodities as an investment. The Standard & Poor's GSCI Index of 24 raw materials dropped as much as 1.6 percent.

Crude declined 2.3 percent on March 20 after Saudi Arabian Oil Minister Ali al-Naimi said the kingdom can boost output by 25 percent. Saudi Arabia is the largest and most influential member of the Organization of Petroleum Exporting Countries.

Saudi Arabia has crude production capacity of 12.5 million barrels a day and will pump about 9.9 million this month and in April, al-Naimi said in Doha, Qatar. The global market is oversupplied by as much as 2 million barrels a day, he said.

Libyan output rose 200,000 barrels to 1.125 million in February, the most in a year, a Bloomberg News survey showed. Iraqi production climbed 10,000 barrels a day to 2.76 million last month, the most since 2000.

Fuel Demand

"We're seeing terrific output from Iraq and Libya and the Saudis made it clear this week that they can easily pump more," Kilduff said. "With all of this supply, attention is shifting to the demand side of the equation."

U.S. fuel demand dropped 4.8 percent to 17.7 million barrels a day last week, according to an Energy Department report yesterday. It was down 8.5 percent from the same period a year earlier. Gasoline demand fell 0.4 percent to 8.38 million barrels a day, 7.7 percent less than the year before.

President Barack Obama said today that his administration will support domestic oil production while adding that won't be enough by itself to lower gasoline prices. Regular gasoline at the pump, averaged nationwide, rose 1.7 cents to a 10-month high of $3.881 a gallon yesterday, according to AAA, the U.S.'s biggest motoring group.

"Producing more oil and gas here at home has been and will continue to be a critical part of an all-of-the-above energy strategy," Obama said in Cushing, Oklahoma, where TransCanada Corp. (TRP) plans to begin building the southern segment of its Keystone XL oil pipeline.

Obama Policies

Obama said he's taking steps to streamline the permitting process for critical infrastructure, including pipelines such as the one planned by TransCanada to deliver oil to the Gulf Coast.

The International Energy Agency isn't planning any coordinated action among its member nations to tap emergency oil stockpiles, the agency's executive director, Maria Van der Hoeven, said in an e-mailed statement today.

Electronic trading volume on the Nymex was 495,608 contracts as of 3:01 p.m. in New York. Volume totaled 473,594 contracts yesterday, 25 percent below the three-month average. Open interest was 1.56 million.