June 4, 2015 / 1:51 AM / 2 years ago

Oil tumbles again before OPEC; worry over spiking European yields

An attendant tops up petrol for a vehicle at a gas station in Taipei March 1, 2011.Pichi Chuang

NEW YORK (Reuters) - Crude prices tumbled almost 3 percent for a second day on Thursday ahead of an OPEC decision likely to keep the market oversupplied and on worry rising European bond yields could tighten the speculative money swirling in oil.

The Organization of the Petroleum Exporting Countries, meeting in Vienna, is expected to affirm on Friday an output target of 30 million barrels per day, ignoring calls from some producers to cut supply and support prices. OPEC actually produces about 2 million bpd above that.

Traders will also be looking out for Friday's U.S. jobs data for May and the latest weekly reading on oil rigs in the United States.

Stronger jobs data could send the dollar higher, hurting overseas demand for dollar-denominated commodities, including oil. A slowing in the U.S. oil rig decline could mean higher future output, another bearish factor.

In Thursday's trade, 10-year German Bund yields, the benchmark for European borrowing costs, hit eight-month highs after their biggest two-day gains since 1998. The spread between that and equivalent U.S. Treasury yields narrowed to its tightest in four months.

"Today's play in oil is as much about macro and bonds as it is about crude and OPEC," said John Kilduff, partner at New York energy hedge fund, Again Capital.

"The spiking Bund yields could lead to a tighter credit environment in Europe that could ostensibly choke off growth and the hot money that is the lifeblood of speculators, including those in the oil market," Kilduff said.

Phil Flynn, analyst at the Price Futures Group in Chicago, agreed.

"There is certainly a 'lack of conviction' trade going on in oil now, with OPEC expected to keep production unchanged or even hike it to match what it is really overproducing," Flynn said. "The European macro front is another drag on the market."

Brent crude LCOc1 settled down $1.77, or 2.8 percent, at $62.03 a barrel.

U.S. crude futures CLc1 also settled down 2.8 percent, or $1.64, at $58 a barrel.

Despite the bearish mood, Saudi Arabia, OPEC's most influential member, raised the official selling price for its benchmark Arab Light crude to Asia in July, citing robust demand in the region and higher consumption at home during the hot summer months.

"There are pockets of strength in Asia," said Seth Kleinman, head of energy research at Citigroup in London. "Light sweet crude in the Atlantic basin is very weak, but Middle Eastern sour grades are stronger."

Additional reporting by Karolin Schaps in London and Henning Gloystein in Singapore; Editing by Cynthia Osterman and Meredith Mazzilli

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