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Oil Below $111 On Demand Forecast Cut, Euro Zone Woes

OPEC cuts global oil demand forecast; Slovakia votes against euro zone bailout fund; U.S. crude stockpiles to rise on higher imports

October 12, 2011 8:01 by



Brent crude fell on Wednesday, snapping five days of gains, after OPEC cut its global oil demand forecast and plans for greater powers for a euro zone bailout fund hit a snag, rattling investor confidence.

The United States is expected to report on Thursday a 700,000-barrel increase in crude oil inventories last week on higher imports and lower refinery utilization rates, which may add to bearish sentiment. Concern that China, the world’s largest energy consumer, may show signs of slowing expansion when it reports trade and producer prices this week, also weighed on markets.

Brent crude for November lost 16 cents to $110.57 a barrel by 0408 GMT, after gaining for a fifth day on Tuesday, rising nearly 11 percent, its biggest rise since August 2009. It rose in the previous session on news of an alleged Iranian plot to assassinate Saudi Arabia’s ambassador in the United States, reintroducing a risk premium to prices.

U.S. crude on the New York Mercantile Exchange was down 48 cents to $85.33 a barrel, after slipping as low as $84.52.

“We have seen quite a good bounce and traders are squaring positions ahead of Chinese data due on Friday,” said Michael McCarthy, chief markets strategist at CMC Markets.

“It’s the same market effect across asset classes. Oil is also a victim to that.”

China will release import-export data for September on Thursday, followed by inflation figures.

Crude imports in the world’s second largest oil consumer are expected to rebound in September as new refineries start production and others return from maintenance, but shipments of iron ore and copper — key barometers of economic activity — could disappoint.

China’s inflation in September may have edged slightly lower although still elevated, highlighting the central bank’s policy dilemma.

EURO CRISIS BROILS

In Europe, Slovakia voted against a plan to expand the euro zone rescue fund, which is seen as crucial to containing the region’s debt crisis. This hurt investors’ confidence, causing Asian stock markets to fall and the dollar strengthened against the euro. A re-vote later this week is likely to succeed though.

“We expect that the EFSF will be passed,” McCarthy said.

On Tuesday, OPEC cut its global oil demand growth forecast for a fourth consecutive month, citing the downturn in developed countries and efforts by China and India to curb fuel use.

Yet the chief economist of the International Energy Agency said global oil demand might be more robust than expected, supported by Asia and the Middle East, even as economic growth in the United States and Europe slowed.

On crude supply, Shell expects to lift a force majeure on Nigerian Forcados crude by late October or November, if all repair works at a major pipeline go to plan.

The outage pushed up prompt prices, widening the backwardation between November and December Brent by $1 to around $2.80 a barrel from a week ago. Brent’s premium to West Texas Intermediate also widened to around $25, up from $23 a week ago.

The steep backwardation will not encourage stock building in the coming weeks and could cause further drawdowns in oil stocks in the United States, J.P. Morgan analysts said in a note.

“Imports should remain low and stocks should continue to draw in the U.S. as a whole, predominantly in the coastal regions, and total U.S. stocks are likely to fall by about 1 million barrels in the reporting week,” the bank said.

By Florence Tan
(Editing by Clarence Fernandez)



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