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Bloomberg : Oil Drops on Concern Europe Debt Will Slow Demand

Date: Mon, 23 May 2011

Futures slid as much as 3 percent after Spain’s governing

Socialist party suffered its worst electoral defeat in more than

30 years and Standard & Poor’s said on May 20 it may lower

Italy’s credit rating. The Dollar Index climbed to its highest

in more than nine weeks as declining Asian stocks spurred demand

for safer assets.

"External macro factors, especially the strength of the

U.S. dollar and the negative start of the week in Asian

equities, have weakened commodities," said Eugen Weinberg, an

analyst at Commerzbank AG. "The dollar is higher against the

euro because of worries about Europe’s debt."

Crude for July delivery lost as much as $2.99 to $97.11 a

barrel in electronic trading on the New York Mercantile

Exchange. It was at $97.24 at 10:42 a.m. London time.

Brent crude for July settlement on the London-based ICE

Futures Europe exchange fell as much as $3.26, or 2.9 percent,

to $109.13 a barrel. On May 20, the contract climbed 97 cents,

or 0.9 percent, to $112.39.

The euro weakened by 1.35 percent against the dollar to

$1.3970, the lowest since March 16. The Dollar Index, which

tracks the greenback against the currencies of six major U.S.

trading partners, rose to 76.366, the strongest since March 16.

A stronger dollar reduces the appeal of commodities as an

alternative to the U.S. currency.

Greek Bonds Plunge

Greek Prime Minister George Papandreou is scheduled to

brief his Cabinet today on budget cuts and asset sales to keep

European aid. Greek government bonds plunged May 20, driving 10-

year yields to a euro-era high, on speculation the nation won’t

be able to avoid reorganizing its debt. The spread, or yield

difference, between the 10-year bonds and similar-maturity

German bunds widened to a record. Fitch cut Greece’s credit

rating to B+ from BB+, four notches below investment grade.

"This past week was fraught with concern that Greece and

Spain’s persistent debt problems could affect global markets,"

John Caiazzo, president of Acuvest Commodity Brokers Inc. in

Temecula, California, said in a note to clients. "We continue

to favor the short side for an eventual move for nearby futures

crude to the $80 to $85 price level."

Consumer Spending Cools

U.S. consumer spending probably cooled in April amid higher

fuel prices, a Bloomberg News survey showed before a government

report this week.

Hedge funds cut bullish bets on oil in New York as the

dollar strengthened amid an exodus from commodities. The funds

and other large speculators reduced so-called net long

positions, or wagers on rising prices, by 13 percent in the

seven days ended May 17, according to the Commodity Futures

Trading Commission’s Commitments of Traders report. They dropped

to the lowest level since the week ended Feb. 15, when the

resignation of Hosni Mubarak as Egypt’s president sent oil to an

11-week low, the May 20 report showed.

In Iceland, a volcanic eruption is abating after forcing

the country’s main international airport to close, the second

such disruption in 13 months to the island nation’s air traffic.

"Prices are on a downwards trend on the back of renewed

Icelandic volcano fears, ongoing European debt miasma and

potentially also the latest CFTC data," analysts led by David

Wech at Vienna-based researcher JBC Energy GmbH said in a note.

Wild Card

An eruption at Eyjafjallajokull on April 14, 2010, closed

European airspace for six days, grounding 100,000 flights at a

cost of $1.7 billion, according to an estimate then by the

International Air Transport Association.

"The volcano in Iceland is still a wild card," Bjarne

Schieldrop, chief commodity analyst at SEB AB, Sweden’s third-

biggest bank by market value, said in a report today.

Economic reports indicated the U.S. economic recovery is

sputtering and fuel demand may drop. The index of U.S. leading

indicators slipped in April after nine months of increases.

Manufacturing in the Philadelphia area grew in May at the

slowest pace in seven months and April existing home sales fell.

Consumer spending probably cooled in April as higher food

and fuel prices forced Americans to cut back on other items,

economists said a government report May 27 will show. Purchases

probably increased 0.5 percent, the smallest gain in three

months, after climbing 0.6 percent in March, according to the

median of 66 estimates in a Bloomberg News survey.

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