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Oil drops below US$85 a barrel, cooling 2-week rally

A two-week rally in oil prices stalled yesterday on concerns that China would take steps to cool its economic growth.

Benchmark oil for December delivery dropped US$2.93, or 3.3 percent, to settle at US$84.88 a barrel on the New York Mercantile Exchange. The drop erased nearly half of this month's increase in the price of oil. Other commodities experienced a sell off, as did stocks.

China, the largest energy consumer in the world, is expected to increase oil consumption by 400,000 barrels per day in 2011 and drive world oil demand for years to come. But analysts say that appetite for crude could be reduced if Beijing moves to control economic growth after inflation hit a 25-month high in October.

Gold fell 2.6 percent and was back below US$1,400 an ounce. Copper dropped 2.8 percent, while Silver slid 5 percent. Stocks of major oil companies like Exxon, Chevron and Royal Dutch Shell all fell more than 1 percent.

While calling the sell-off "a much needed correction" in commodities, Mike Zarembski, an analyst with OptionsXpress, pointed out that previous attempts by China to control inflation did little to temper the country's oil consumption.

The news out of China might have spooked traders this week, "but I don't think this oil rally is over just yet," he said. Before yesterday's drop, oil had risen 7.7 percent this month and hit a two-year high in the process.

Oil trader and analyst Stephen Schork said oil will continue to be heavily influenced by the US dollar. Oil is priced in dollars, and it tends to move opposite the dollar in commodities markets. When the dollar falls, for example, investors look to park their money in safer investments like energy commodities, and this pushes the price of oil higher.

That's been the case since late August, when the Federal Reserve indicated it would take more steps to stimulate the US economy. Since then, oil prices jumped more than US$14 per barrel, nearly 20 percent, as the dollar declined 7 percent against the euro. Last week, the Fed said it will pump US$600 billion into a bond-buying program, effectively reducing already low interest rates.

In other Nymex trading in December contracts, heating oil fell 6.34 cents to settle at US$2.3632 a gallon and gasoline futures fell 2.58 cents to settle at US$2.2099 a gallon. Natural gas dropped 12.8 cents to settle at US$3.799 per 1,000 cubic feet.

In London, Brent crude slid US$2.47 to settle at US$86.34 a barrel on the ICE Futures exchange.




 

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