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Oil price slips on weak economy
Source: Agencies |
June 9, 2012, Saturday
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Online Edition
Online Edition
THE price of oil fell slightly yesterday on the prospect of weak economic growth with no immediate assistance from the U.S Federal Reserve.
Oil ended the week at US$84.10 per barrel, within US$1 of its close last week. It remains near its lowest level since October of last year.
Higher oil production and weakness in economies around the world that are now burning less gasoline and other fuels have helped push down crude prices 14 percent in the last month and 25 percent from a high in February.
"It's a world of terrible news and a huge build (of oil stocks)," says Rich Ilczyszyn, an analyst and founder of the trading firm iiTrader.com.
US drivers have welcomed the lower oil prices, though. Retail gasoline prices have fallen steadily since their peak of US$3.94 a gallon April 6. The national average fell half a penny to US$3.555 yesterday, according to the Oil Price Information Service, AAA, and Wright Express.
US benchmark crude fell 72 US cents yesterday, a drop of 0.8 percent. Brent crude, which is used to make gasoline in much of the US, fell 46 US cents to US$99.47.
More declines could be on the way. Julian Jessop, Chief Global Economist at Capital Economics, thinks oil prices will end the year "much lower than they are now."
Demand for oil to make fuels for shippers and travelers is down because Europe remains mired in a debt crisis and economic growth in the US and China has slowed. At the same time, oil supply has risen in recent months. Production in Libya, Iraq and the United States is growing. Saudi Arabia has been pumping more oil to offset supply loses from Iran, which is struggling to export crude under tightening Western sanctions.
By the end of last week, oil prices had fallen to US$83.23, down 25 percent from a high of US$109.77 on Feb. 24 and down 14 percent from US$97.01 on May 8.
This week, though, oil began to rise on hopes of a US financial stimulus plan before returning to very close to their recent lows.
Investors thought Federal Reserve Chairman Ben Bernanke would unveil a plan to buy bonds or take other measures that would lower interest rates. When borrowing costs fall, it effectively boosts the amount of money in the economy, giving investors cheap money to buy oil and other assets. This also lowers the value of the dollar and makes oil less expensive for overseas buyers.
But Bernanke told Congress Thursday that no plan was imminent. That sent the value of the dollar higher.
Without the prospect of cheap and abundant dollars yesterday, investors were left with simple choice: Whether to buy or sell oil based on world supply and demand. They sold.
Addison Armstrong, an analyst at Tradition Energy, said that based on supply and demand, there was no reason for oil to cost as much as it did earlier this year. It is now near a price he considers "fair value."
One of the chief reasons for the recent drop in global oil prices is the change in the growth prospects in China. Judith Dwarkin, Chief Energy Economist at ITG Investment Research, said China is expected to account for half of the overall growth in global oil demand.
But growth in China has been slowing sharply. Investors expect the country will soon reveal that growth continued to slacken in May. If China is not using more oil, global demand won't rise nearly as much as expected - if it rises at all.
"Imports of crude (into China) have fallen, taking the steam out of world crude prices," Dwarkin said.
China cut state-set gasoline and diesel prices for the second time in a month yesterday in an effort to reduce costs for drivers and shippers, part of a larger plan to try to reverse a sharp slowdown in the world's second-largest economy. The 26-cent-per gallon cut reduced gasoline prices in Beijing, which has among the most expensive gasoline prices in China, to US$4.58 per gallon.
Though the government price cut may boost oil demand somewhat in China, investors interpreted the cut as an indication that the slowdown in economic growth might be even more drastic than anticipated.
In other energy trading, natural gas futures rose 3 US cents to close at US$2.30 per thousand cubic feet. Heating oil fell less than one cent to close at US$2.67 per gallon. Wholesale gasoline rose 6 US cents to close at US$2.68 per gallon.
Oil ended the week at US$84.10 per barrel, within US$1 of its close last week. It remains near its lowest level since October of last year.
Higher oil production and weakness in economies around the world that are now burning less gasoline and other fuels have helped push down crude prices 14 percent in the last month and 25 percent from a high in February.
"It's a world of terrible news and a huge build (of oil stocks)," says Rich Ilczyszyn, an analyst and founder of the trading firm iiTrader.com.
US drivers have welcomed the lower oil prices, though. Retail gasoline prices have fallen steadily since their peak of US$3.94 a gallon April 6. The national average fell half a penny to US$3.555 yesterday, according to the Oil Price Information Service, AAA, and Wright Express.
US benchmark crude fell 72 US cents yesterday, a drop of 0.8 percent. Brent crude, which is used to make gasoline in much of the US, fell 46 US cents to US$99.47.
More declines could be on the way. Julian Jessop, Chief Global Economist at Capital Economics, thinks oil prices will end the year "much lower than they are now."
Demand for oil to make fuels for shippers and travelers is down because Europe remains mired in a debt crisis and economic growth in the US and China has slowed. At the same time, oil supply has risen in recent months. Production in Libya, Iraq and the United States is growing. Saudi Arabia has been pumping more oil to offset supply loses from Iran, which is struggling to export crude under tightening Western sanctions.
By the end of last week, oil prices had fallen to US$83.23, down 25 percent from a high of US$109.77 on Feb. 24 and down 14 percent from US$97.01 on May 8.
This week, though, oil began to rise on hopes of a US financial stimulus plan before returning to very close to their recent lows.
Investors thought Federal Reserve Chairman Ben Bernanke would unveil a plan to buy bonds or take other measures that would lower interest rates. When borrowing costs fall, it effectively boosts the amount of money in the economy, giving investors cheap money to buy oil and other assets. This also lowers the value of the dollar and makes oil less expensive for overseas buyers.
But Bernanke told Congress Thursday that no plan was imminent. That sent the value of the dollar higher.
Without the prospect of cheap and abundant dollars yesterday, investors were left with simple choice: Whether to buy or sell oil based on world supply and demand. They sold.
Addison Armstrong, an analyst at Tradition Energy, said that based on supply and demand, there was no reason for oil to cost as much as it did earlier this year. It is now near a price he considers "fair value."
One of the chief reasons for the recent drop in global oil prices is the change in the growth prospects in China. Judith Dwarkin, Chief Energy Economist at ITG Investment Research, said China is expected to account for half of the overall growth in global oil demand.
But growth in China has been slowing sharply. Investors expect the country will soon reveal that growth continued to slacken in May. If China is not using more oil, global demand won't rise nearly as much as expected - if it rises at all.
"Imports of crude (into China) have fallen, taking the steam out of world crude prices," Dwarkin said.
China cut state-set gasoline and diesel prices for the second time in a month yesterday in an effort to reduce costs for drivers and shippers, part of a larger plan to try to reverse a sharp slowdown in the world's second-largest economy. The 26-cent-per gallon cut reduced gasoline prices in Beijing, which has among the most expensive gasoline prices in China, to US$4.58 per gallon.
Though the government price cut may boost oil demand somewhat in China, investors interpreted the cut as an indication that the slowdown in economic growth might be even more drastic than anticipated.
In other energy trading, natural gas futures rose 3 US cents to close at US$2.30 per thousand cubic feet. Heating oil fell less than one cent to close at US$2.67 per gallon. Wholesale gasoline rose 6 US cents to close at US$2.68 per gallon.
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