Bloomberg reported that crude oil fell on speculation that Europe’s debt crisis will spread hindering economic growth and reducing fuel demand.
Oil dropped as much as 1.6% after Moody’s Investors Service said that the bailout of Ireland by the European Union and the International Monetary Fund may increase the debt burden and pose a credit negative for the country. It climbed as much as 1.1% on the initial news of the bailout.
Mr Tom Bentz a broker with BNP Paribas Commodity Futures Inc in New York said that there are some question marks about the situation and the optimism has faded. Crude oil for January delivery fell 24 cents or 0.3% to settle at USD 81.74 per barrel on the New York Mercantile Exchange. Prices have gained 6.5% in the past year. Brent crude oil for January settlement dropped 41 cents, or 0.5% to USD 83.93 per barrel on the London based ICE Futures Europe exchange.
Mr Dietmar Hornung senior credit officer of Moody said that the aid package will crystallize more bank contingent liabilities on the government balance sheet and increase the Irish sovereign’s debt burden.
According to a Goldman Sachs Group Inc estimate, the bailout may total USD 130 billion. Ireland was the second EU nation after Greece to seek a rescue this year. Hedge funds cut bullish bets on oil by the most in almost three months amid speculation fallout from the Irish debt crisis and China’s efforts to curb inflation will slow economic growth, sapping demand for fuel.
According to the US Commodity Futures Trading Commission’s weekly report November 19, large speculators reduced so called long positions, or wagers on rising prices by 15% in the seven days ended November 16.
Bets on gains in oil prices rose to the highest level in four years in the week before the Federal Reserve announced it would spend USD 600 billion buying Treasuries through the second round of so called quantitative easing or QE2.
Mr Phil Flynn a Chicago based analyst and trader with investment adviser PFGBest said that “This shows that the market’s kind of convinced that this QE2 rally could be coming to an end. We know that the funds have backed off quite a bit and that’s reflecting the uncertainty moving forward with the demand side of the equation.”
Equities and other commodities dropped amid concern that Ireland’s debt crisis will spread adding pressure to the oil contract. The Standard & Poor’s 500 Index retreated 0.6% to 1,192 and the Dow Jones Industrial Average fell 77.50 points or 0.7% to 11,126.05.
Mr Rich Ilczyszyn a market strategist at Lind Waldock, a broker in Chicago said that the market peaked out at around USD 88 with the equities and we’re now forming a little bit of a base. The low risk trade is to buy near the October low of USD 79.25. If the equities continue to roll over and the dollar holds we could drop below USD 79.
The bank said that the bigger risk in the near term will come from the current exceptional strength in diesel demand which could push Chinese oil demand to new highs in November and December.
(Sourced from Bloomberg)
