Oil in Free Fall as Economic Worries Spur Selling

Oil prices were in free fall Friday as worries about a weakening global economy combine with seemingly ample supplies and less fear of a confrontation with Iran.


Traders also point to new margin requirements by the CFTC, announced Thursday. However, those requirements do not go into effect until August, and the bigger factor behind the selling is concerns about a global slowdown.

West Texas crude finsished down nearly 4 percentat $98.49 per barrel, after breaking key technical levels and the psychological $100 mark. WTI has now wiped out all of its gains for the year and is down fractionally for the year and down 6 percent on the week.

Brent crude, the international bench mark, was also tumbling, down 2.5 percent at $113.18 per barrel after breaking through its 200-day moving average of $113.60. It lost 5.6 percent for the week.

Traders also exited positions ahead of the weekend elections in Europe, which could bring a fractured government to Greece and a new Socialist president to France.

But the big driver is the concern that the U.S. economy is not strong enough to withstand a weak European economy and slower growth in China. The disappointing April jobs report Friday, showing just 115,000 nonfarm payrolls were added, was the latest catalyst for a second day of heavy selling.

“We had one positive thing (U.S. ISM manufacturing data) and about 10 negative things, and now it’s all starting to come to a head,” said trader Anthony Grisanti of GRZ Energy. “You can’t just ignore what is going on in the world.”

One positive effect of falling oil prices is that it will take pressure off gasoline and other refined products, making it more likely consumers have already seen the highest gasoline prices of the year. The national average is now $3.80, down from $3.92 a month ago and below last year’s average of $3.98, according to AAA.

Traders also said the recent quiet surrounding Iran has punctured some of the geopolitical risk built into oil prices. As rhetoric around Iran’s nuclear program and the sanctions against it created concerns that world oil supplies would be tightened, Saudi Arabia and other producers increased production.

“The physical market loosened up several weeks ago, thanks to increased Saudi production and seasonal refinery maintenance, but the futures market has been slow to respond. The jobs numbers out this morning appear to have catalyzed a change in market sentiment with concerns about demand weakness in the West outweighing fears of Iran-related disruptions,” said Trevor Houser, partner with the Rhodium Group.

Earlier this week, government data showed that crude oil inventories were at their highest level since September 1990. Stockpiles nationwide rose by 2.84 million barrels last week. Inventories at the key Cushing, Okla., hub hit a record high and gained 4.4 million barrels, or 11.5 percent, over the past six weeks.

International supply also seems to have relaxed. OPEC Secretary General Abdalla el-Bardi also stressed this week that the organization was actively pumping above its official target to try to bring prices down. “We are not happy with prices at this level because there will be destruction as far as demand is concerned,” he said, reiterating that $100 a barrel oil was a comfortable price.

The spread between Brent crude and WTI has narrowed significantly, falling to a low of $12.50 temporarily. “The premium earlier this years was $25,” said Gene McGillian, analyst and broker with Tradition Energy. McGillian said as the reversal of the Seaway Pipeline comes on line in the next several weeks, pushing more North American crude to the Gulf Coast refineries, oil prices could continue to be pressured.

“The market is basically finding a new equilibrium point, and I think going forward. The problems facing the European economy and (data) in the United States suggests a slowdown, and as we don’t have a rising premium for risk, the market is finding fair value in the 90s,” said McGillian. “The market could quickly move to re-establish the geopolitical risk premium,” he added.

Barclays analysts pointed out that oil has corrected similarly in the past two Mays, and the correction is likely temporary.

“OPEC output at three-year highs coupled with a softening in demand conditions has resulted in inventory builds, exacerbated by record refinery runs globally while the return of Iran to the negotiating table has eased geopolitical concerns, for now. However, beyond the short-term softness, we expect oil prices to find support into Q3,” they wrote.

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