Oil Drops on Economic Growth Concern as Bin Laden Death Boosts Volatility

Oil dropped for a second day in New York on signs growth in the U.S. economy may slow, while traders prepared for further price swings on concern the death of Osama bin Laden will spark retaliatory attacks by terrorists.

Crude, which touched a 2 1/2-year high yesterday, fell as much as 0.8 percent after the Institute for Supply Management’s manufacturing index declined to the lowest in four months. U.S. crude stockpiles rose last week from the highest since November, according to a Bloomberg News survey before an Energy Department report tomorrow. Oil options volatility increased after news of the al-Qaeda leader’s death.

“U.S. oil demand is pretty soft as high prices are clearly having a dampening effect,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. “There’s no reason why the risk premium should decline lastingly on bin Laden’s death. War in Libya and unrest in the Middle East has been more important than terrorism fears.”

Oil for June delivery dropped as much as 89 cents to $112.63 a barrel in electronic trading on theNew York Mercantile Exchange. The contract was at $112.84 at 10:24 a.m. London time. Yesterday, it lost 0.4 percent to $113.52 after earlier reaching $114.83, the highest since September 2008. Futures have gained 31 percent in the past year.

Brent crude for June settlement on the London-based ICE Futures Europe Exchange fell as much as $1.01, or 0.8 percent, to $124.11 a barrel. Yesterday, it dropped 0.6 percent to $125.12.

Price Swings

Oil in New York yesterday decreased as much as 2.7 percent, the most in two weeks, after bin Laden was killed in Pakistan, before rebounding 0.8 percent. Implied volatility for at-the- money options expiring in June, a measure of expected price swings in futures and a gauge of options prices, was 28 percent today, up from 26.2 percent April 29.

“Following the initial emotional response to bin Laden’s death, markets soon snapped back to reality,” economists at Australia & New Zealand Banking Group Ltd. led by Warren Hoganwrote in a note today. “There are now concerns that retaliatory attacks could occur, and this has seen oil prices recoup most of their early losses.”

Bin Laden encouraged attacks on oil facilities as a way to damage the U.S. and European economies. Crude infrastructure in Saudi Arabia, holder of the world’s largest reserves, was targeted by al-Qaeda from 2002 as it sought to bring down the ruling al-Saud family. Saudi Arabian forces foiled the biggest attempted attack in 2006 on the Abqaiq oil-processing center, which handles two-thirds of the kingdom’s supply.

Rising Streak

Crude has advanced this year as unrest in the Middle East and North Africa toppled leaders in Tunisia and Egypt and spread to Libya, Algeria, Bahrain, Iran, Oman, Syria and Yemen. Oil in New York has increased for eight months, the longest rising streak on record.

Brent, the European benchmark, traded at a premium of $11.51 a barrel to U.S. futures. The difference between front- month contracts in London and New York surged to a record $19.54 on Feb. 21. The spread averaged 76 cents last year.

An Energy Department report tomorrow may show crude stockpiles climbed 3 million barrels from 363.1 million last week, according to the median estimate from seven analysts surveyed by Bloomberg News.

The ISM’s manufacturing index declined to 60.4 last month from 61.2 in March, the Tempe, Arizona-based group said yesterday. That’s the lowest reading this year.

Credit Suisse cut its estimate of China’s economic growth for this year and 2012 after the nation’s Purchasing Managers’ Index slipped to 52.9, below the median forecast of 53.9 in a Bloomberg News survey of 20 economists. The country is the world’s second-largest crude consumer, after the U.S.

(Source: http://www.bloomberg.com/news/2011-05-03/oil-drops-on-economic-growth-concern-as-bin-laden-death-boosts-volatility.html)