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Oil drops below US$100 on worry of weaker US demand
Source: Agencies |
May 6, 2011, Friday
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OIL plunged nearly 9 percent to settle below US$100 per barrel. Investors who had ridden a months-long rally fled the market yesterday because of concerns about weakening demand for fuel in the US.
The decline of US$9.44 per barrel, or 8.6 percent, brings the week's loss for oil to US$14.13, or 12.4 percent. Other commodities like silver and cotton have plunged as well.
Oil rose 35 percent from mid-February through the end of April. As it climbed above US$100, economists warned that high fuel prices were taking a toll on the US economy. Gasoline demand starting falling in March as motorists paid more at the pump; that trend was reinforced by industry and government studies released this week. On yesterday, worries about the job market ahead of Friday's key employment report added to concerns about fuel demand.
"More and more people were saying that oil was just too high," said Michael Lynch, president of Strategic Energy & Economic Research. "That got a lot of investors ready to run for the door. That's what they're doing now."
A higher dollar also contributed to yesterday's sell-off. Benchmark West Texas Intermediate crude for June settled at US$99.80 per barrel on the New York Mercantile Exchange. That's the lowest settlement since March 16. Oil last had a one-day percentage decline this big on April 20, 2009. Back then a barrel of oil cost less than half as much as it does now.
Analysts also said the lack of any terrorist retaliation of the killing of Osama bin Laden eased concerns about the safety of the world's oil fields.
Oil and other commodities have been on a roll since around Labor Day, when the Federal Reserve indicated it would take more steps to boost the US economy. The Fed's announced a plan to buy back US$600 billion in Treasury bonds. The move effectively lowered interest rates but also weakened the dollar and unleashed inflation fears. Investors poured that extra money into oil, precious and base metals and grains.
This year, uprisings in Libya and the Middle East gave a further lift to energy markets.
This week investors have reversed those bets on commodities and locked in profits.
The plunge in oil may be enough to keep pump prices from reaching a national average of US$4 per gallon. Retail gasoline has surged 30 percent this year. It's risen for 44 consecutive days to US$3.985 per gallon.
Fred Rozell, retail pricing director at Oil Price Information Service, a private research and consulting firm, said the national average probably won't get to US$4 per gallon.
"I wouldn't be surprised if we dropped to about US$3.50 by the middle of June," Rozell said.
Expensive fuel bills can crimp customers' spending habits. Earlier in the week, reports from MasterCard SpendingPulse and the Energy Department showed that Americans bought less gas in the final week of April.
Some retailers warned yesterday that soaring gasoline prices are starting to cut into the spending power of lower-income customers who were already on tight budgets. Also, the government said that the number of people applying for unemployment benefits reached an eight-month high. Distress in the job market depresses gasoline demand, analysts say, because large numbers of Americans drive to work.
"Commuters are the bedrock of gasoline demand," Cameron Hanover analyst Peter Beutel said. When people lose jobs, "you're killing the best part of that demand - the part that will always be there as long as someone has a job."
Companies feel the squeeze of high oil prices as well. Four of the nation's top airlines combined to lose US$1 billion in the first quarter, largely because of the high price of jet fuel.
Other energy futures fell sharply as well. Heating oil fell 25.61 cents to settle at US$2.8869 per gallon and gasoline futures lost 22.71 cents to settle at US$3.0954 per gallon. Natural gas gave up 31.3 cents to settle at US$4.331 per 1,000 cubic feet.
In London, Brent crude lost US$10.39 to settle at US$110.80 per barrel on the ICE Futures exchange.
The US dollar rose strongly against the euro yesterday after the European Central Bank's president declined to signal that interest rates would rise again next month. Oil, which is traded in dollars, tends to fall as the greenback rises and makes crude barrels more expensive for investors holding foreign money.
The decline of US$9.44 per barrel, or 8.6 percent, brings the week's loss for oil to US$14.13, or 12.4 percent. Other commodities like silver and cotton have plunged as well.
Oil rose 35 percent from mid-February through the end of April. As it climbed above US$100, economists warned that high fuel prices were taking a toll on the US economy. Gasoline demand starting falling in March as motorists paid more at the pump; that trend was reinforced by industry and government studies released this week. On yesterday, worries about the job market ahead of Friday's key employment report added to concerns about fuel demand.
"More and more people were saying that oil was just too high," said Michael Lynch, president of Strategic Energy & Economic Research. "That got a lot of investors ready to run for the door. That's what they're doing now."
A higher dollar also contributed to yesterday's sell-off. Benchmark West Texas Intermediate crude for June settled at US$99.80 per barrel on the New York Mercantile Exchange. That's the lowest settlement since March 16. Oil last had a one-day percentage decline this big on April 20, 2009. Back then a barrel of oil cost less than half as much as it does now.
Analysts also said the lack of any terrorist retaliation of the killing of Osama bin Laden eased concerns about the safety of the world's oil fields.
Oil and other commodities have been on a roll since around Labor Day, when the Federal Reserve indicated it would take more steps to boost the US economy. The Fed's announced a plan to buy back US$600 billion in Treasury bonds. The move effectively lowered interest rates but also weakened the dollar and unleashed inflation fears. Investors poured that extra money into oil, precious and base metals and grains.
This year, uprisings in Libya and the Middle East gave a further lift to energy markets.
This week investors have reversed those bets on commodities and locked in profits.
The plunge in oil may be enough to keep pump prices from reaching a national average of US$4 per gallon. Retail gasoline has surged 30 percent this year. It's risen for 44 consecutive days to US$3.985 per gallon.
Fred Rozell, retail pricing director at Oil Price Information Service, a private research and consulting firm, said the national average probably won't get to US$4 per gallon.
"I wouldn't be surprised if we dropped to about US$3.50 by the middle of June," Rozell said.
Expensive fuel bills can crimp customers' spending habits. Earlier in the week, reports from MasterCard SpendingPulse and the Energy Department showed that Americans bought less gas in the final week of April.
Some retailers warned yesterday that soaring gasoline prices are starting to cut into the spending power of lower-income customers who were already on tight budgets. Also, the government said that the number of people applying for unemployment benefits reached an eight-month high. Distress in the job market depresses gasoline demand, analysts say, because large numbers of Americans drive to work.
"Commuters are the bedrock of gasoline demand," Cameron Hanover analyst Peter Beutel said. When people lose jobs, "you're killing the best part of that demand - the part that will always be there as long as someone has a job."
Companies feel the squeeze of high oil prices as well. Four of the nation's top airlines combined to lose US$1 billion in the first quarter, largely because of the high price of jet fuel.
Other energy futures fell sharply as well. Heating oil fell 25.61 cents to settle at US$2.8869 per gallon and gasoline futures lost 22.71 cents to settle at US$3.0954 per gallon. Natural gas gave up 31.3 cents to settle at US$4.331 per 1,000 cubic feet.
In London, Brent crude lost US$10.39 to settle at US$110.80 per barrel on the ICE Futures exchange.
The US dollar rose strongly against the euro yesterday after the European Central Bank's president declined to signal that interest rates would rise again next month. Oil, which is traded in dollars, tends to fall as the greenback rises and makes crude barrels more expensive for investors holding foreign money.
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