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07-05-2011, 06:41 AM
May 7, 2011
NEWS analYSIS
Oil bubble pricked by a host of factors
NEW YORK: The killing of Osama bin Laden may have been the catalyst for the four-day rout in oil prices that is deflating commodity prices around the world, but the reasons go beyond that.
Crude, which has risen 17 per cent since Feb 16 when protests began in Libya, tumbled 12 per cent in the past four days after the terrorist kingpin's death in a US raid in Pakistan, including Thursday's 8.6 per cent plunge to US$99.80 a barrel on the New York Mercantile Exchange, the biggest one-day decline since April 20, 2009.
'The death of Osama bin Laden was a big enough story to pop the bubble this time around,' said Ms Sarah Emerson, managing director of Energy Security Analysis. 'The death of bin Laden wiped away the Arab Spring premium and changed the focus to the demand picture, which is worrisome.'
Oil surged in the past two months as violence swept through north Africa and the Middle East, disrupting 1.3 million barrels a day of supply from Libya and raising concerns of shortages from the Persian Gulf.
But global investors have become nervous about the strength of the global recovery after disappointing job data out of the United States and manufacturing figures in Europe.
The combination of Osama's death, declining German factory orders, an unexpected increase in US jobless claims and swelling energy inventories in America cooled speculators who had driven the S&P commodities index up 12 per cent between Feb 1 and May 4.
Commodity prices have also been hit by a strengthening US dollar after the European Central Bank played down its concerns about inflation, lowering the prospect of another euro-zone rate hike in the near future. That sent the dollar surging 1.9 per cent to US$1.4539 against the euro on Thursday.
Oil's rally this year came as the dollar dropped because of a US Federal Reserve bond purchase programme known as quantitative easing, or QE2. A weak US currency bolsters the appeal of raw materials priced in the dollar to investors.
But Fed chief Ben Bernanke confirmed last week that QE2 will end next month, boosting the dollar.
Thursday's rout included declines in 23 of the 24 commodities in Standard & Poor's GSCI Index, led by North Sea Brent oil, lead, diesel and silver. The precious metal has plunged as the CME Group raised margin requirements by 84 per cent in less than two weeks.
'It was pretty much a bloodbath all day,' said Mr Fred Rigolini, vice-president of Paramount Options in New York. 'A lot of funds were liquidating and fleeing to the dollar for safety.'
Oil also fell, as the US Labour Department said that applications for jobless benefits rose by 43,000 to 474,000 last week, the most since August. Factory orders in Germany, adjusted for seasonal swings and inflation, dropped 4 per cent from February, according to the Economy Ministry in Berlin.
The 'jobs number was an incredible disappointment because it really throws cold water on the idea the US economy is finally getting on its feet', said Mr James Cordier, portfolio manager at OptionSellers.com. 'The unwinding starts with profit-taking by a certain few and then everyone is unwinding the risk trade, all those who were long commodities, short the dollar.'
Demand for oil has also been weakening in the US. Petrol consumption has also dropped 2.2 per cent to 8.94 million barrels a day last week, an Energy Department report on Wednesday showed. Total fuel demand slipped 6.4 per cent to 18.3 million barrels a day, the lowest level since November 2009. Crude oil stockpiles rose 3.42 million barrels to 366.5 million last week, the highest level since October, the report said.
Mr Tim Evans, an energy analyst at Citi Futures Perspective, said the build-up in US crude-oil inventories appeared to have reached such a high level that it has erased concerns that the Libyan revolt will translate into physical tightness.
BLOOMBERG
NEWS analYSIS
Oil bubble pricked by a host of factors
NEW YORK: The killing of Osama bin Laden may have been the catalyst for the four-day rout in oil prices that is deflating commodity prices around the world, but the reasons go beyond that.
Crude, which has risen 17 per cent since Feb 16 when protests began in Libya, tumbled 12 per cent in the past four days after the terrorist kingpin's death in a US raid in Pakistan, including Thursday's 8.6 per cent plunge to US$99.80 a barrel on the New York Mercantile Exchange, the biggest one-day decline since April 20, 2009.
'The death of Osama bin Laden was a big enough story to pop the bubble this time around,' said Ms Sarah Emerson, managing director of Energy Security Analysis. 'The death of bin Laden wiped away the Arab Spring premium and changed the focus to the demand picture, which is worrisome.'
Oil surged in the past two months as violence swept through north Africa and the Middle East, disrupting 1.3 million barrels a day of supply from Libya and raising concerns of shortages from the Persian Gulf.
But global investors have become nervous about the strength of the global recovery after disappointing job data out of the United States and manufacturing figures in Europe.
The combination of Osama's death, declining German factory orders, an unexpected increase in US jobless claims and swelling energy inventories in America cooled speculators who had driven the S&P commodities index up 12 per cent between Feb 1 and May 4.
Commodity prices have also been hit by a strengthening US dollar after the European Central Bank played down its concerns about inflation, lowering the prospect of another euro-zone rate hike in the near future. That sent the dollar surging 1.9 per cent to US$1.4539 against the euro on Thursday.
Oil's rally this year came as the dollar dropped because of a US Federal Reserve bond purchase programme known as quantitative easing, or QE2. A weak US currency bolsters the appeal of raw materials priced in the dollar to investors.
But Fed chief Ben Bernanke confirmed last week that QE2 will end next month, boosting the dollar.
Thursday's rout included declines in 23 of the 24 commodities in Standard & Poor's GSCI Index, led by North Sea Brent oil, lead, diesel and silver. The precious metal has plunged as the CME Group raised margin requirements by 84 per cent in less than two weeks.
'It was pretty much a bloodbath all day,' said Mr Fred Rigolini, vice-president of Paramount Options in New York. 'A lot of funds were liquidating and fleeing to the dollar for safety.'
Oil also fell, as the US Labour Department said that applications for jobless benefits rose by 43,000 to 474,000 last week, the most since August. Factory orders in Germany, adjusted for seasonal swings and inflation, dropped 4 per cent from February, according to the Economy Ministry in Berlin.
The 'jobs number was an incredible disappointment because it really throws cold water on the idea the US economy is finally getting on its feet', said Mr James Cordier, portfolio manager at OptionSellers.com. 'The unwinding starts with profit-taking by a certain few and then everyone is unwinding the risk trade, all those who were long commodities, short the dollar.'
Demand for oil has also been weakening in the US. Petrol consumption has also dropped 2.2 per cent to 8.94 million barrels a day last week, an Energy Department report on Wednesday showed. Total fuel demand slipped 6.4 per cent to 18.3 million barrels a day, the lowest level since November 2009. Crude oil stockpiles rose 3.42 million barrels to 366.5 million last week, the highest level since October, the report said.
Mr Tim Evans, an energy analyst at Citi Futures Perspective, said the build-up in US crude-oil inventories appeared to have reached such a high level that it has erased concerns that the Libyan revolt will translate into physical tightness.
BLOOMBERG
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