Oil slides 2 percent as commodities slump

By Robert Gibbons

NEW YORK (BestGrowthStock) – Oil prices slid more than 2 percent on Tuesday, retreating from a 27-month high and dropping below $90 a barrel, as profit-taking struck the commodities complex following a rally over the thin holiday trading period.

Investors said abrupt selling across energy, metal and agricultural markets reflected a correction to the rally that capped 2010, rather than a sudden reversal of the optimism that made commodities the top asset class last year.

“Today’s sharp price pullback appeared to represent a raft of profit taking in conjunction with a broad based exit of length off of the overall commodity base,” Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, said in a note.

Some additional pressure came from a rebound by the dollar, which turned positive on an improving U.S. economic outlook.

U.S. crude oil for February delivery fell $2.17, or 2.37 percent, to settle at $89.38 a barrel, off an early peak of $92.07, but settling well above the $88.36 intraday low.

The slide was the biggest single-day percentage loss since November 16, when prices closed 2.97 percent lower.

Total U.S. crude futures trading volume rebounded from thin holiday volumes, trading 761,173 lots, well above the 250-day average of 670,799 lots, according to Reuters data.

In London, ICE Brent crude for February fell $1.31 to settle at $93.53, well off an early $95.74 peak.

Brent crude’s premium to the U.S. benchmark West Texas Intermediate crude rose to as much as $4.27 a barrel intraday on Tuesday, the highest since September, with a tight nearby supply picture and expectations for lower Nigerian exports cited as factors by brokers.

Oil prices pared losses after the December Federal Open Market Committee minutes said the Federal Reserve would stick to its $600 billion bond-buying program.

The Fed’s simulative policies are viewed as bearish for the U.S. dollar. A weaker dollar typically lifts prices of dollar-denominated oil because it lowers the value of greenbacks paid producers and makes oil less expensive for consumers using other currencies.

Copper, gold, cocoa and sugar all fell sharply. The Reuters-Jefferies CRB index (.CRB: ) dropped 2 percent in its sharpest one-day fall since mid-November.

The retreat by U.S. oil futures came after they settled at a 27-month peak above $91 a barrel on Monday as U.S. and European manufacturing data suggested improving economic growth that could bolster oil demand.

“Built into pricing for commodities was a premium for flight to safety,” said John Kilduff, a partner at Again Capital LLC in New York.

“With the economic recovery now in plain view and equities coming back into favor, that vestige of safety is losing its appeal. It’s happening with oil and there’s a similar free fall in precious metals.”

EYEING U.S. OIL INVENTORIES

U.S. crude prices held losses in post-settlement trading after industry group the American Petroleum Institute’s weekly inventory report showed crude oil stockpiles fell 7.5 million barrels, much more than expected. (API/S: )

Distillate stocks rose 2.2 million barrels and gasoline stocks rose 5.6 million barrels, both up more than expected.

Ahead of weekly oil inventory reports, U.S. crude oil stocks were estimated to have fallen by 1.8 million barrels last week in a Reuters survey of analysts.

Distillate stocks were expected to be up 400,000 and gasoline stocks up 300,000 barrels.

Traders noted that there was an expectation that oil inventories will rebound in the new year and provide pressure on prices after companies drew down stored supplies for tax reasons at the tail end of 2010.

The U.S. Energy Information Administration’s report will follow on Wednesday at 10:30 a.m. EST (1530 GMT).

(Additional reporting by the New York Energy Desk, Dmitry Zhdannikov in London, Alejandro Barbajosa in Singapore)

Oil slides 2 percent as commodities slump