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Oil falls most since November on Fed comments
Aggregated Source: Shanghai Daily: Business

OIL was swept up in the broad sell-off in stocks and bonds yesterday, as a combination of weak Chinese manufacturing data and the Federal's Reserve's shifting stance on economic stimulus rattled energy markets.

Oil had its biggest one-day price drop since November. US benchmark oil for July delivery sank US$2.84, or 2.9 percent, to finish at US$95.40 a barrel on the New York Mercantile Exchange. Gasoline futures fell more than 3 percent.

Brent crude, a benchmark for many international oil varieties, was down US$3.97, or 3.7 percent, to end at US$102.94 per barrel on the ICE Futures exchange in London.

On Wednesday Fed chairman Ben Bernanke suggested that he was optimistic about the US economy - and that the Fed might start scaling back its massive US$85 billion-a-month bond-buying program this year if conditions continue to improve. The Fed could end the program by the middle of next year, Bernanke said.

The Fed program has kept borrowing costs near historic lows for consumers and business. It has also helped boost the equities and energy markets.

Stocks and bonds sold off immediately after Bernanke's comments. Oil didn't react much because Bernanke spoke just as US energy markets closed Wednesday.

Lower stocks and a stronger dollar put pressure on oil prices. Once trading opened in Asia yesterday oil fell sharply, in tandem with Asian stock markets. Bernanke's comments also gave a boost to the dollar. Oil traders look to the stock market as a measure of confidence in the US economy, while a strong dollar makes oil more expensive for holders of other currencies.

The Dow Jones industrial average fell 354 points, or 2.3 percent, yesterday to close at 14,758. Shares of Exxon Mobil Corp. and Chevron Corp., both Dow components, fell by more than 2 percent. The euro slipped to US$1.3197 from US$1.3274 in New York a day earlier. The yield on the benchmark 10-year note rose to its highest level since August 2011.

Also weighing on oil prices was a survey showing a slowdown in manufacturing in China. HSBC's preliminary purchasing managers' index fell to a nine-month low of 48.3 in June, down from 49.6 in May. Numbers below 50 indicate a contraction.

With mature economies like Europe and the US struggling to expand at a steady pace, China and emerging markets have accounted for most of the growth in oil demand over the past several years.

"A weakening in Chinese industrial activity could easily translate to a reduced flow of products exports out of the US Gulf," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, in a daily report.

Still, Ritterbusch and most others don't expect a free-fall in the price of oil. He said fears of an escalation of the civil war in Syria should support oil around the US$94 level.

In other energy futures trading on the Nymex:

- Wholesale gasoline was down 10.5 cents, or 3.6 percent, to finish at US$2.79 a gallon.

- Heating oil fell 10 cents, or 3.4 percent, to end at US$2.87 per gallon.

- Natural gas retreated by 9 cents, or 2.2 percent, to finish at US$3.88 per 1,000 cubic feet.

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Copyright Shanghai Daily: Business