Oil falls sharply as stocks rise more than expected, recession worries remain
Oil fell sharply as worries over a looming US recession will crimp demand combined with improved supply side news in the form of better-than-forecast increases in US energy inventories.
The US Energy Information Administration said earlier US crude stocks rose by 7 mln barrels last week to total 300 mln barrels. Analysts were expecting stocks to rise by only 2.07 mln barrels.
Meanwhile gasoline stocks rose by 3.6 mln barrels last week against forecasts for a 1.7 mln barrel rise, while distillate inventory grew by 0.1 mln barrels against calls for a 1.9 mln barrel decline.
‘The major figures were all bearish relative to expectations… About the only supportive element is the drop in refining rates, but no one will care when product stocks are rising,’ said Citigroup (NYSE:C) analyst Tim Evans.
At 3.40 pm, New York’s WTI crude for March delivery was down 1.61 usd at 86.86 usd per barrel, having dropped 1.61 usd to close at 88.41 usd yesterday.
In London, Brent crude for March delivery was down 1.14 usd at 87.70 usd per barrel.
Oil reversed earlier losses, as traders took the view yesterday’s selling was overdone, and grew nervous this afternoon’s US inventory data might not show the expected large gains in fuel stockpiles.
‘I think really it (the price gain) has more to do with short covering before the stats come out this afternoon,’ said Bache Financial trader Christopher Bellew.
He added however that overall, prospects for sustained price gains are slim.
The US economic outlook has worsened considerably in recent days, while there are growing fears the rest of the world will not emerge unscathed from the downturn.
Yesterday, data from the Institute of Supply Management showed activity in the US services sector slumped to its worst level since March 2003. And in the Eurozone, the PMI services reading plunged to its lowest since July 2003.
‘The US economy just attracts more bad news and demonstrates its fragility. It should be noted that other global economies are being sucked into its wake,’ said MF Global (NYSE:MF) senior broker Robert Laughlin.
He added oil demand should slip as a result, and that oil prices will come under renewed pressure in the short term.
At 1.00 pm, New York’s WTI crude for March delivery was up 48 cents at 88.89 usd per barrel, having slid 1.61 usd to close at 88.41 usd yesterday.
In London, Brent crude for March delivery was up 71 cents at 89.53 usd per barrel.
Analysts expect US inventory data, scheduled for release at 3.30 pm, will show crude oil stocks rose by 2.07 mln barrels last week, while gasoline supplies grew by 1.7 mln barrels.
Distillates inventory, which includes heating oil, likely fell 1.9 mln barrels, but the decline is unlikely to boost oil prices, especially with rising concerns over the demand outlook.
‘Long-term bullish oil fundamentals like tight supplies, the weak dollar and geopolitical risks are still intact, but they are likely to remain overshadowed by economic jitters,’ said analysts at Sucden.
Oil prices have fallen some 12 pct off a record 100.09 usd set in early January, as demand worries grow amid fears the US housing and credit crisis is pulling the real economy into recession.
In addition, players are growing increasingly worried about the global growth outlook. To date, global equities — seen by oil traders as a proxy for economic growth — have tracked US equities very closely.
US stocks posted their worst sell-off in nearly a year yesterday, sending Asian equities sharply lower overnight and igniting a weaker tone in European equities today.
‘What is making the slowdown in the US even more painful is that it is starting to spread,’ said MF Global analyst Ed Meir. He added while the contagion is centred on Europe for now, there are problems elsewhere.
China is currently grappling with power shortages that have been exacerbated by the worst winter storms in decades. In addition, it might yet soon have to contend with softness in its export markets.
As a result, many analysts believe oil is on track to sink lower.
‘The pricing foundations are getting weaker and the risk is getting bigger for any negative statistics to create an acceleration of the correction,’ said Petromatrix analyst Olivier Jakob.
Looking ahead, it is as yet unclear whether OPEC will attempt to support oil prices by cutting output at its production meeting next month. The cartel has so far resisted such moves.
Yesterday, OPEC Secretary General Abdalla El-Badri said the cartel will roll over production quotas in March if market conditions remain as they are currently.
Others in the cartel have indicated otherwise, however.
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