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Oil Falls to One-Week Low on Concern U.S. Budget Talks May Fail

Nov. 28 (Bloomberg) -- Oil dropped to the lowest level in more than a week as concern mounted that negotiations to address the U.S. budget deficit will fail.

Futures decreased as much as 2.1 percent after U.S. Senate Majority Leader Harry Reid said yesterday he was disappointed with progress made during talks over $607 billion in tax gains and spending cuts, the so-called fiscal cliff, set to begin in January. Crude rebounded from the day’s lows after an Energy Department report showed supplies unexpectedly fell last week.

“Economic and political concerns are dominating market sentiment right now,” said Adam Wise, who helps manage a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “The failure to reach an efficient resolution to the fiscal-cliff issue is raising concern about the economy.”

Crude oil for January delivery dropped $1.08, or 1.2 percent, to $86.10 a barrel at 1:55 p.m. on the New York Mercantile Exchange. The contract touched $85.36, the lowest level since Nov. 16. Prices have fallen 13 percent this year.

Brent oil for January settlement declined 82 cents, or 0.7 percent, to $109.05 a barrel on the London-based ICE Futures Europe exchange.

Republicans and Democrats disagree about how to reduce future deficits and how quickly to do so, and those divides have stalled negotiations.

Budget Positions

President Barack Obama, a Democrat, wants to lean more heavily on tax increases for top earners and less on structural changes to Medicare and Medicaid benefits. House Speaker John Boehner, a Republican, has expressed openness to higher revenue if accompanied by an overhaul of the tax code and significant reductions in future spending on entitlement programs.

Erskine Bowles, the co-chairman of the president’s 2010 fiscal commission, said it’s unlikely Obama and Congress will reach a deal by the end of this year to avert the fiscal cliff. He said there is a one-third probability the sides will strike a deal by the end of 2012. He spoke today at a breakfast in Washington sponsored by the Christian Science Monitor.

“Worries about the fiscal cliff are at the forefront of everyone’s mind at the moment,” said Julius Walker, global energy markets strategist at UBS Securities LLC in New York. “There have been a number of statements by some high-profile people that have raised concerns that we’ll go over the cliff, which would reduce oil demand.”

Boehner Statement

Futures eased declines after Boehner told reporters in Washington that he is optimistic lawmakers engaged in budget talks can “avert this crisis sooner rather than later.” Obama said at the White House today that an agreement on the deficit can be reached “before Christmas.”

Prices also pared losses after the Energy Department said crude supplies declined 347,000 barrels to 374.1 million in the seven days ended Nov. 23. They were forecast to rise 350,000 barrels, according to the median estimate of 11 analysts surveyed by Bloomberg.

Output climbed by 108,000 barrels a day to 6.82 million last week, the highest level since February 1994, the report showed. Production has climbed 12 weeks, the longest stretch of gains since at least 1990. The gain has come as new technology unlocked supply in fields such as the Bakken shale in North Dakota and the Eagle Ford in Texas.

‘Great Strides’

“The U.S. is making great strides in increasing oil output,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado, which manages $530 million. “Going forward, this is going to pay significant economic dividends for the country.”

Gasoline inventories surged 3.87 million barrels to 204.3 million, the biggest increase since July and more than four times a projected gain of 900,000. Supplies of distillate fuel, a category that includes heating oil and diesel, fell 800,000 barrels to 112 million, versus an expected increase of 500,000.

Total fuel demand dropped 2.4 percent to 19 million barrels a day last week, the report showed. Gasoline consumption decreased 5.3 percent to 8.43 million.

“The fundamental picture is pretty bearish in the U.S.,” Wise said. “There’s increasing access to domestic supply while demand remains sluggish.”

Electronic trading volume on the Nymex was 348,053 contracts as of 1:55 p.m. Volume totaled 358,626 contracts yesterday, 31 percent lower than the three-month average. Open interest was 1.52 million.

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