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Oil
On August 9, in the London market world oil prices fell below $70 a barrel for the first time since June, on worries that energy demand may weaken amid US economic woes, analysts said.
Brent North sea crude for September delivery fell to $69.30 per barrel, the lowest since June 13. It later stood at $69.65 per barrel, down $1.34. Crude oil prices were lower as concerns over the prospect of slower oil demand persist, Sucden analyst said. The New York contract had soared to an historic high of $78.77 on August 1, on news of sliding crude stock piles in the US, the world’s biggest consumer of energy.
But a weaker turn for the US housing sector had since rattled global financial markets and there are concerns that the slowdown could dampen economic growth and reduce demand for oil.
“Market participants are concerned about slowing demand in the top consumer, especially after a report showed weaker than expected jobs growth in the United States (on August 3), further dampening hopes for a soft landing for the country’s economy,” Sucden analyst Michael Davies said.
“It seems that, contrary to many previous views, troubles in the sub-prime mortgage market are spilling over into other sectors, including commodities and energy, as investors become increasingly risk averse and pull funds out of the market to protect profits, or cover losses,” he added.
World oil prices fell for the third straight day on August 10, with a barrel of Brent below $69 for the first time since June, on concern that energy demand may weaken amid the US sub-prime crisis.
MF Global analyst Edward Meir noted that while energy markets had initially ignored the sub-prime crisis, oil prices are now closely linked to broader economic woes. “Demand (of energy) could be the surprising variable that could warrant more attention in the weeks and months ahead,” he said.
Inventories: Crude futures are meanwhile sliding despite the US Department of Energy (DoE) reporting recently that crude inventories fell by 4.1 million barrels to 340.4 million barrels in the week ended August 3. The inventory decline was much sharper than forecast. Most analysts were expecting stocks to have dropped by 2.75 million barrels.
On August 1, new US record smashed the previous all-time high of 78.40 that was set on July 13, 2006, amid violence between Israel and Lebanon in the oil-rich Middle East.
It also beat London Brent’s historic high point of $78.64 per barrel, which was set on August 7, 2006, after a pipeline spill forced British firm BP to close output from Prudhoe Bay, the biggest oil field in the United States.
Apart from the US factor, there are no major fundamental stories dragging down prices.
Opec, source of more than a third of the world’s oil meets on September 11 to set production policy. Two weeks earlier when oil prices had set new records, the head of the International energy Agency urged the Opec oil group to increase production.
Opec has resisted previous IEA appeals to pump more crude to keep oil prices down, arguing that higher prices reflect not supply tightness but rather refining problems in the United States and geopolitical tensions.
The IEA said in its monthly report that the main oil producers would have to release an extra 2.5 million barrels a day in the final quarter to keep up with higher than expected global demand.
IAE principal analyst Lawrence Eagles said there would be a “supply deficit” in the third quarter and Opec’s reluctance to increase production would hit supplies at the end of the year.
Gold
Gold prices slipped in the London market on August 6, after hitting one week highs, on a weaker dollar, as oil prices declined and concerns about credit markets resurfaced. Spot gold rose as high as $676.50 an ounce before falling to $671.10/671.90.
The dollar softened broadly, touching a 15-year low against a basket of currencies as investors speculated that rising credit-market risk and softening US data could force a cut in US interest rates.
The deepening malaise in global credit markets sent US stocks hurtling lower on August 3 and the spillover continued into the weekend as the president of Bear Stearns resigned after the brokerage said on August 3 fixed income markets were going through their roughest patch in over 20 years.
Asian and European equities posted further losses on August 6, while credit spreads widened further and government bonds rose.
Gold traditionally has been used by investors as protection against economic and political uncertainty. But in recent months it has behaved much like other financial assets because of the growing role of commodities in diversified portfolios. Gold often moves in the opposite direction of the dollar and generally seen as a hedge against oil-led inflation. Oil fell towards $74 a barrel, extending the previous session’s decline.
COPPER:
Copper was down to five week lows on August 6, but analysts expect strong demand from China to buoy the metal used widely in the construction and power industries. Copper for delivery in three months on the London Metal Exchange hit $7585 a tonne, the lowest since July 2. Copper is playing with the news that there’s more weakness ahead, says an analyst at BNP Paribas.
Part of the reason why base metals have held up relatively well has been the weaker dollar, which tumbled to a four-month low against the yen and near a record low against the euro.
A weaker US currency makes dollar-denominated metals cheaper for consumers and investors in other currencies.
The United States is the world’s second largest consumer of copper, but the top user is China, where economic growth is strong despite government efforts to engineer a slowdown.
