Crude Sinks as Fed Jitters Send Traders Scrambling

Oil gas derrick
Getty Images

Oil futures lost nearly two percent on Wednesday, in part due to losses in U.S. equity markets on worries the U.S. Federal Reserve could phase out its stimulus program.

U.S. equity markets fell broadly on Wednesday, at one point losing more than 1 percent, in a sharp retreat from recent record levels. The drop followed a sudden move in U.S. Treasuries on expectations that the Fed will begin to pare its monetary stimulus as the U.S. economy improves.

Crude prices tumbled sharply just after 10 a.m. EDT (1400 GMT) in a high volume sell-off that sent prices down more than $1 a barrel in the span of 15 minutes.

Gasoline also lost more than 1 percent in a similar rapid sell-off an hour later, which traders attributed to a technical event known as the "death cross," in which the 50-day moving average of prices crosses the 200-day moving average.

Front-month Brent futures fell $1.80 to settle at $102.43, and extended losses to over $2 during post-settlement trading. The loss comes after Tuesday's gains of more than $2, when Brent reached its highest level since May 21.

U.S. crude shed $1.88 to settle at $93.13, and also lost more than $2 during post-settlement trading.

"We're following the risk trade, which is the stock market," said Rich Ilczyszyn, chief market strategist and founder of LLC in Chicago.

Investors fear that stronger U.S. data could prompt the Federal Reserve to scale back its quantitative easing program, which has helped push money into riskier assets such as commodities in recent years.

The pullback leaves both Brent and U.S. crudes in the middle of the bands in which they have hovered through May, highlighting a lack of trading conviction amid uneven global economic data and concerns that signs of recovery in the United States could curb the Fed's liquidity program.

"It's become a fairly tight trading range," said Andy Lebow, vice president at Jefferies Bache in New York.

"U.S. crude is settling into the $92 to $98 range, and Brent too is kind of locked into the $100 to $106 range."

In Vienna, OPEC oil ministers looked set to keep oil output targets steady for 2013, with representatives signaling they are happy with current price levels.

"There's a growing confidence that OPEC is unlikely to take any action that would keep a firm floor under prices," said Tim Evans, energy specialist with Citi Futures Perspective in New York.

Prices came under early pressure from weak growth forecasts for No. 2 oil consumer China. The International Monetary Fund cut its growth forecast for China this year to 7.75 percent from 8 percent, citing a weak world economy and exports, while the OECD cut its forecast to 7.8 percent from 8.5 percent.

"The IMF downgrade of the Chinese economic outlook is going to be difficult to overcome today," said John Kilduff, a partner at Again Capital in New York.

The market will be closely watching U.S. inventory data from the American Petroleum Institute on Wednesday and the Energy Information Agency on Thursday for further signals.

On Tuesday, upbeat U.S. housing and consumer confidence data sparked expectations of improved demand from the world's top consumer and pulled Brent prices up as much as $2 during the day.

Traders were also closely watching the conflict in Syria that has underpinned concerns about supply from the Middle East and lent support to oil prices. Britain and France said on Tuesday they did not have to wait until Aug. 1 to arm rebels fighting Syrian President Bashar al-Assad, and Russia said it would not scrap plans to deliver an air defense system to the conflict-ridden nation.