Oil market 'was overdue for a shake-out'

New York :  Crude oil tumbled, capping its biggest weekly decline in 16 months, on concern Europe's debt crisis will slow the global economic recovery.

Futures dropped to the lowest level in 12 weeks as equities fell amid speculation Greece's financial distress will spread to other countries. German Chancellor Angela Merkel said euro-area countries must speed up efforts to tighten financial regulation and pursue budget consolidation.

"The continued problems over in Europe seem to be infecting the rest of the world," said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. "If this thing continues it could really hurt the chances of a global recovery."

Crude oil for June delivery fell $2 (Dh7.34) or 2.6 per cent, to settle at $75.11 a barrel on the New York Mercantile Exchange, the lowest price since February 12. Futures are down 13 per cent for the week, the biggest drop since the week ended December 19, 2008.

Shakeout ‘overdue'

Oil settled at an 11-week closing low of $77.11 in New York on Friday after the euro fell against the dollar and the Dow Jones Industrial Average lost 998.5 points, or 9.2 per cent, in intraday trading, the biggest fall since 1987.

Futures touched $87.15 a barrel on May 3, the highest level since October 2008.

"The oil market was overdue for a shake-out like this," said Addison Armstrong, director of market research at Tradition Energy, a Stamford, Connecticut-based procurement adviser. "Eighty-seven dollars certainly wasn't a justifiable level based on the fundamentals and if you start thinking about the potential ramifications for economic growth of what's happening in Europe."

A 110 billion-euro (Dh513.5 billion) aid package to avoid a default by Greece has failed to prevent bond yields from rising, driving up borrowing costs for countries including Spain and Portugal. Moody's Investors Service on Friday placed Portugal on review for a possible downgrade.

US payrolls jumped 290,000 last month, more than the median estimate of economists surveyed by Bloomberg News, after a revised 230,000 increase in March that was larger than initially estimated, figures from the Labour Department in Washington showed Friday.

If commodities and equities "struggle to move higher in the wake of this positive report, the specter of bearish forces for growth may be larger than participants are currently pricing in and could push commodity and equity markets lower," said Jason Schenker, president of Prestige Economics LLC, an energy consultant, in a report Friday.

Average

Oil settled below its 200-day moving average for the first time since May 2009, a technical indicator that prices may continue to fall.

"It could spark a $15 decline," Jim Stellakis, an independent analyst, said yesterday in a forecast projecting a move to $60 a barrel if prices closed below the support level.

The Standard & Poor's 500 Index fell 1.5 per cent to 1,110.86 after plunging as much as 3 per cent. The Dow Jones Industrial Average lost 140.72 points, or 1.3 per cent, to 10,379.60.

The Reuters/Jefferies CRB Index of 19 commodities fell 0.6 per cent to 261.32, the weakest level since February 5. Six of the commodities retreated, led by cocoa, crude and heating oil.

"The market is not getting over the concerns of where we end up after the Greece situation gets resolved," said John Kilduff, a partner at Round Earth Capital, a New York-based hedge fund that focuses on food and energy.

Supplies

Record supplies of oil at Cushing, Oklahoma, the delivery point for New York-traded futures, have widened the price differential for oil for delivery in June and July. The July contract was $3.40 a barrel more expensive than the June contract today, the widest spread between the two most active oil contracts on the Nymex since February 17, 2009.

Oil inventories at Cushing jumped 1.68 million barrels, or 4.9 per cent, to 36.2 million last week, the Energy Department reported, the largest amount in data going back to 2004. Overall US stockpiles gained 2.76 million barrels, or 0.8 per cent, to 360.6 million barrels, the highest level since June. The figure is 5.4 per cent above the average over the past five years.