Crude Oil Falls 7% On Economic Concerns

by Shane
(UK)

While President Obama signed off the $787 billion stimulus package, economic concerns weighed on crude oil prices which fell almost 7% on Tuesday.

Nymex light crude shed $2.57 to $34.94 a barrel on Tuesday, meanwhile London Brent crude was $2.24 lower at $41.04.

It seems a number of analysts are worried about the spectre of deflation, as demand for manufactures continues to fall, the real estate market continues to sink and unemployment rises with around 15 million Americans now out of work.

According to DoE figures, crude oil inventories are now around 350.8 million barrels, which is at the upper end of the range for this time of year.

Having suffered a huge demand shock, with prices falling from last July's high of $147 to around $35 today, the crude oil market is looking to see what further action OPEC will take.

The oil producers' cartel has said on many occasions that it is aiming for a price of around $70 a barrel, and has announced cuts of about 4 million barrels a day.

Saudi Arabia has expressed concerns that its economy may growth may suffer if crude prices remain at current levels and don't approach their preferred floor of around $70 a barrel.

There is always a question of compliance within Opec and we will need to see if all its members have carried through on the agreed reductions at the Vienna and Oran conferences last October and December respectively.

Despite the cuts agreed the price of oil still seems to be falling and there is even speculation that Opec may have to look for a further cut of say 1.5 to 2 million barrels a day.

It was only a few weeks ago that there were amazing contango profits to be made by buying crude oil and storing the physical commodity in tankers, and anchoring these off the coast.

Even with the cost of leasing and insurance there were at one stage profits of over $12 a barrel to be made, and when you consider that these bulk carriers can hold a million or two barrels, that's serious money.

Now, however, these big contango profits have gone and the spread between the futures and spot prices is only around $2 to $3 a barrel.

Even as these stocks are released from the tankers, the tighter supply from the Opec cuts should see prices firming over the coming months.

Yet while the lower crude price is a reflection of weakening global economic growth, this does appear to be helpful to some of the emerging markets, where the governments subsidise the price of crude oil.

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