BL: Oil Declines More Than $2 a Barrel on Signs Rally Unjustified
By Mark Shenk
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May 22 (Bloomberg) -- Crude oil fell more than $2 a barrel on signs that a 15 percent increase in prices this month isn't justified by stockpiles and demand.
Consumption averaged 20.3 million barrels a day in the past four weeks, down 1.3 percent from a year earlier, the Energy Department said yesterday. Prices climbed above $135 a barrel today as OPEC ministers said they could do nothing to prevent higher prices because they are pumping at capacity.
``The fundamentals justify a price between $80 and $100,'' said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. ``The run-up in prices has more to do with institutional investors coming into the market. There's nothing to discourage them from doing so because the returns have been so high.''
Crude oil for July delivery fell $2.36, or 1.8 percent, to settle at $130.81 a barrel at 2:46 p.m. on the New York Mercantile Exchange after reaching a record $135.09. It was the biggest one-day drop in three weeks. Prices have more than doubled over the past year.
``Even a bull market has to consolidate at some point and it looks like that's what's happening today,'' said Addison Armstrong, director of market research at TFS Energy LLC in Stamford, Connecticut.
Brent crude oil for July settlement declined $2.19, or 1.7 percent, to settle at $130.51 a barrel on London's ICE Futures Europe exchange. The contract touched a record $135.14 today.
`You have to be bullish until we see a much bigger pullback than is occurring today, and when that happens we will be looking for a correction, nothing more,'' said Eric Wittenauer, an energy analyst at Wachovia Securities in St. Louis.
Higher Returns
Investors looking for higher returns moved to commodity markets over the past year because they outperformed stocks. The Standard & Poor's 500 Index declined 8.6 percent from a year ago to 1,393.59. The Dow Jones Industrial Average dropped 6.7 percent to 12,630.83 during the same period.
``The recent surge is a function of short covering in the market,'' Wittenauer said. ``We are giving back some of this gain, but it's too early to call a top to the market.''
Traders who are ``short'' are betting on a decline. They need to purchase contracts to close out their short positions.
``We are not in charge anymore,'' Shokri Ghanem, Libya's top oil official, told Bloomberg Television today.
The Organization of Petroleum Exporting Countries has ``no magic solution'' to high prices, Qatar's Oil Minister Abdullah bin Hamad al-Attiyah said today in a phone interview from Doha.
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.
Last Updated: May 22, 2008 16:31 EDT
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