Oil prices dropped yesterday (Wednesday) as news that oil majors’ Gulf of
Mexico facilities were unscathed coupled with the dollar’s seven-month high
against the euro sent crude futures lower.
Light sweet crude oil for October delivery dropped 86 cents to $108.85 per
barrel on the New York Mercantile Exchange (NYMEX) yesterday. Oil had traded as
low as $107.60 earlier in the day.
Oil prices are down 7% over the past four trading sessions, according to
MarketWatch data, and are down 26% from their July 11
record of $147.27.
Back in Production
“With Gustav out the way, investor focus is shifting
back to weakening demand for energy and other commodities and the broad strength
in the U.S. dollar,” Andrey Kryuchenkov, an analyst at London-based Sucden,
told the Bloomberg.
Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) and ConocoPhillips (COP) reported no damage to oil platforms in the Gulf and Exxon
Mobil Corp. (XOM) announced workers would be returning to oil
platforms outside Gustav’s path. The reports of little to no damage put downward
pressure on oil prices that had inflated prior to Gustav’s passing.
Also, yesterday, the U.S. government released some of its oil reserves in
order to make up for any potential shortfall from decreased Gulf oil operations
as Hurricane Gustav passed. Late Tuesday, the government announced it was
releasing 250,000 barrels of crude stock due to the shutdown.
Oil firms had shutdown their Gulf of Mexico facilities on Tuesday, as a
precautionary measure during the storm. The region normally accounts for 25% of
U.S. oil production.
“The release of the oil will prevent any shortage
and that will, of course, help calm the market,” Victor Shum, an analyst with
energy consultancy Purvin and Gertz, told
AFP.
Stronger Greenback
Meanwhile, the dollar’s climb against the euro is making oil more expensive
in the 15-nation Eurozone, leading many to think European demand could weaken as
the Eurozone economy recorded a decline in gross
domestic product in the second quarter.
“The U.S. economy is now looking stronger than
Europe’s, which is giving the dollar strength and reducing the appeal of
commodities,” Rick Mueller, director of oil markets at Energy Security Analysis
Inc. in Wakefield, Massachusetts, told Bloomberg News.
The euro declined to $1.4385, its lowest level since Jan. 22, before
trading at $1.449 at 2:00 p.m. in New York.
The strengthening greenback is making commodities such as oil less attractive
to investors as an inflation hedge.
Ospraie Management LLC, at one time the largest commodities-focused hedge
fund, announced it would be closing after losing 38.6% this year. The news could
prompt other funds to pare back on commodities holdings, causing oil prices to
sink lower.
“The next number we are going to test is $100,” Chip Hodge, a managing
director at MFC Global Investment Management in Boston, told
Bloomberg. “One hedge fund has shut down and the
demand picture here has been ugly, so the market will remain under downward
pressure.”
