Crude Oil Plunges as Higher Prices Are Forecast to Curb Growth

Oil fell, capping the biggest two- day drop in almost 11 months, after the International Energy Agency and International Monetary Fund said that prices above $100 a barrel are starting to hurt the global economy and Goldman Sachs Group Inc. forecast a “substantial” correction.

Oil plunged 3.3 percent after the IEA reported signs of an oil-demand “slowdown” in its monthly Oil Market Report today. The IMF cut its growth forecasts yesterday for the U.S. and Japan, two of the top three oil-consuming countries. Brent oil may drop more than $15 to $105 a barrel, Goldman said in a note to clients today.

“Right now, we’re in free-fall range,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “We have a market condition that was way overbought, so now its length is getting stomped out of the market. There could be a ways to go in this selloff.”

Crude oil for May delivery fell $3.67 to $106.25 a barrel on the New York Mercantile Exchange, the lowest settlement since March 30. Prices have tumbled 5.8 percent since April 8, the biggest two-day retreat since May 14 and 17, 2010. Futures have risen 26 percent in the past year.

Prices declined from the settlement after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles rose 1.19 million barrels to 355.5 million. May oil was down $3.90, or 3.6 percent, to $106.02 a barrel in electronic trading at 4:33 p.m.

‘The Surest Remedy’

“There are real risks that a sustained $100-plus price environment will prove incompatible with the currently expected pace of economic recovery,” the Paris-based IEA said. “The surest remedy for high prices may ultimately prove to be high prices themselves.”

The U.S. today boosted its crude-oil price forecast for 2011 to an average $106.38 a barrel from $101.77 a barrel last month, according to the Energy Department’s Short-Term Energy Outlook. It left its global consumption forecast unchanged at 88.2 million barrels a day.

Yesterday, the Paris-based IEA said worldwide oil demand will rise by 1.4 million barrels, or 1.6 percent, this year to average 89.4 million a day. The forecast was unchanged from March.

The U.S., the world’s largest economy, will expand 2.8 percent this year, down from 2.9 percent last year and a 3 percent growth rate for 2011 forecast in January, the IMF said yesterday. It cut Japan’s 2011 growth forecast to 1.4 percent from 1.6 percent in a January forecast.

Confirming Suspicions

“Yesterday’s IMF statement that the U.S. and Japan economies are being hurt by higher energy prices confirmed everybody’s suspicions,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “We’ll move back to the $104-$105 level where we’ve got some technical support.”

Brent oil for May settlement fell $3.06, or 2.5 percent, to end the session at $120.92 a barrel on the London-based ICE Futures Europe exchange.

The oil market will pull back toward a $105-a-barrel near- term target for Brent, David Greely in New York and Jeffrey Currie in London said in the Goldman report. They cited high inventories and spare production capacity.

“There’s fundamental support for the market, just at a lower level than prices had risen,” Greely, head of energy research at Goldman Sachs, said in a telephone interview. “There’s support longer term, particularly in 2012. Prices simply rose sooner than the physical market supports.”

U.S. crude oil stockpiles probably increased 1 million barrels last week, according to a survey of 16 analysts before an Energy Department report tomorrow.

Commodity Basket

Yesterday, oil tumbled from a 30-month high of $112.79 a barrel as Goldman Sachs ended a recommendation to buy a basket of commodities including crude oil, copper, cotton and platinum, saying the risks outweigh any further potential gain. The basket of raw materials was first recommended by Currie on Dec. 1. It had gained 25 percent since then.

“The Goldman thing is probably one of the bigger factors,” said Kyle Cooper, director of research for IAF Advisors in Houston. “A whole lot of the market is still dictated by money flow. You’ve got a situation where Goldman decided to take profits.”

The so-called CCCP basket had a 40 percent weighting in oil, 20 percent in copper, 10 percent in soybeans, 10 percent cotton and 20 percent platinum.

Japanese Nuclear Crisis

Oil also fell today after Japan’s Nuclear and Industrial Safety Agency raised the severity rating of its nuclear crisis at the Fukushima Dai-Ichi station to the highest level, matching the severity of the 1986 Chernobyl disaster and boosting concern that the crisis will curb Japanese demand.

The accident at the plant followed a record earthquake and tsunami on March 11.

“No matter how much oil people think they’re going to export to Japan to make up for the nuclear loss, we’re going to see that economy take a turn for the worse,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “If Japan really starts to deteriorate, its biggest trade partner is China, and they’re going to feel it next.”

China is the second-biggest oil-consuming country.

Oil volume in electronic trading on the Nymex was 993,886 contracts as of 4:33 p.m. in New York. Volume totaled 747,902 contracts yesterday, 6.3 percent below the average of the past three months and the highest level since March 16. Open interest was 1.57 million contracts.

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