Crude Oil Declines as Optimism Over China’s Currency Move Fades

Crude oil declined for the first time in three days as optimism faded that China’s plan to add more flexibility in the yuan’s fixed exchange rate would strengthen the global economic recovery.
Oil gave up yesterday’s gains as equities fell on renewed concern that Europe’s sovereign-debt crisis will affect economic recovery. Goldman Sachs Group Inc. reduced its crude price forecasts today. The People’s Bank of China said June 19 it’s increasing the flexibility for the yuan, marking an end to the crisis policy of pegging the currency to the dollar.
“Traders realized that whatever the Chinese will do regarding the yuan will be gradual and so the likely impact on immediately boosting Chinese demand for oil will be modest,” said Victor Shum, a senior principal with energy consultants Purvin & Gertz Inc. in Singapore. “The European debt crisis, the fragile recovery of the U.S. economy -- those things still prompt investors to lock in profits when oil prices gain.”
Crude for July delivery dropped as much as 85 cents, or 1.1 percent, to $76.97 a barrel in electronic trading on the New York Mercantile Exchange, and was at $77.06 at 1:45 p.m. Singapore time. Yesterday, oil rose 64 cents, or 0.8 percent, to settle at $77.82. The contract expires today.
The more-actively traded August contract declined as much as 85 cents, or 1.1 percent, to $77.76 a barrel, and was at $77.86 a barrel. Futures have dropped 2.9 percent this year.
China, the world’s most-populous nation, consumes more oil than any country except the U.S. China’s central bank said there’s no basis for “large-scale” moves in its currency even as it pledged increased exchange-rate flexibility.
Brent Crude
Brent crude for August settlement declined as much as 84 cents, or 1.1 percent, to $77.98 a barrel on the ICE Futures Europe exchange in London, and was at $78.10 at 1:46 p.m. Singapore time. Yesterday, the contract advanced 60 cents, or 0.8 percent, to settle at $78.82.
Asian stocks fell for the first time in nine days after Fitch Ratings downgraded Paris-based BNP Paribas SA and Standard & Poor’s Ratings Services said Spanish lenders face difficult years because of the nation’s slow growth. The MSCI Asia Pacific Index fell 0.7 percent to 118.28 at 2:12 p.m. in Tokyo.
The S&P 500 lost 0.4 percent to 1,113.20 as of 4 p.m. in New York, wiping out an earlier advance of 1.2 percent. The Dow Jones Industrial Average decreased 8.23 points, or 0.1 percent, to 10,442.41.
“It was a pretty significant reversal for the U.S. equity markets, which feeds through to oil market sentiment,” said Toby Hassall, a commodity analyst at CWA Global Markets Pty in Sydney. China’s decision to end the yuan’s peg “is a double- edged sword. It’s going to negatively affect U.S. importers, those importing Chinese goods, but at the same time it can be seen as a positive to those exporting to China,” he said.
U.S. Inventories
Goldman Sachs Group Inc. cut its price forecasts for crude oil because commodity markets are “fragile” on concern growth in Europe and China will slow, the bank said in a report today.
“Commodity markets are generally rebounding strongly off their lows but sentiment remains fragile on European and Chinese concerns,” said analysts led by New York-based Allison Nathan.
West Texas Intermediate oil was forecast at $87 a barrel for a three-month period, down 9.4 percent from a $96 prediction Goldman Sachs made in a May 10 report. It also downgraded estimates for six-month and 12-month crude and for Brent oil.
Oil prices at the top end of the $70-to-$80 a barrel range are “a little high” at the beginning of the summer driving season in the U.S., said Purvin’s Shum. Gasoline consumption peaks from the Memorial Day weekend in late May to Labor Day in early September.
“When we go deeper into summer, if indeed there is strong demand growth for gasoline in the U.S., then there will be more reason for oil pricing to get to the top end of the $70-$80 range,” Shum said.