Crude oil futures sank more than 4% Friday as confidence in the speed of economic and oil demand recovery was shaken.
Light, sweet crude for September delivery settled $3.01, or 4.3%, lower at $67.51 a barrel on the New York Mercantile Exchange, the lowest finish since July 30. Brent crude on the ICE futures exchange settled $1.07, or 1.5%, lower at $72.41 a barrel.
Oil prices have been caught in a $68-$70 range since the beginning of the month, as traders weighed the prospects for economic recovery against continued weak oil demand. Futures broke out of this range, falling as low as $67.29 a barrel, after U.S. data showed a surprise drop in the latest survey of consumer confidence. These data came in one day after a weaker-than-expected U.S. retail sales report that indicated the worst recession in 50 years is keeping consumers anchored.
"When consumer confidence came in, everything turned south," said Gene McGillian, a broker at Tradition Energy. "Consumer spending represents 70% of GDP, and if people are not spending, this doesn't bode well for energy demand."
Oil prices were pressured further by sliding equities. Crude futures have risen in the past weeks on firmer stocks, which vaulted to new year highs this month after the release of a slew of better-than-expected earnings and economic data. But investor sentiment shifted after the weak consumer confidence reading, pushing the Dow Jones Industrial Average lower.
This latest revival of risk aversion sent investors out of commodities, which are perceived to be relatively risky assets, and into the dollar, which strengthened against the euro on Friday. A stronger dollar sometimes discourages crude purchases made by those using other currencies. The dollar also gained ground as fears of inflation abated. The U.S. Labor Department on Friday said consumer prices were unchanged on the month in August and down 2.1% on year. The euro was recently at $1.4178 from Thursday's $1.4293.
Market participants say there is a potential for prices to fall as quickly as they did in early July, when crude shed almost $10 in nine sessions.
"I see the same downside risk that we had in the first couple weeks in July, when we had a combination of weaker equities and a lack of physical tightness to cushion the decline," said Tim Evans, an analyst with Citi Futures Perspective.
Demand for crude oil remains depressed in U.S., according to the latest Energy Information Administration data. Crude oil inventories have risen for three-straight weeks, while refineries are operating at their lowest level relative to capacity in 25 years amid slack gasoline demand.
"A lot of people were calling for a lower price because fundamentals are weak," said Tony Rosado, broker at GA Global Markets. "The $65 price becomes an attraction now."
Other market participants believe prices should be even lower than $65.
"The price that clears the market in crude oil is probably around $58-$59 dollars a barrel based strictly on the fundamentals," said Jim Ritterbusch, president of Ritterbusch and Associates.
September reformulated gasoline blendstock settled down 8.12 cents, or 4%, at $1.9380 a gallon, breaking below the psychological $2 level for the first time since July 30. September heating oil settled 6.18 cents, or 3.2% lower, at $1.8410 a gallon. link.....
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