Oil falls to 18 - month low on global growth worries

22 June 2012 05:25 am

Brent crude fell to its lowest in 18 months yesterday at about $92 per barrel on demand growth concerns as China’s factory sector slowed and as the U.S. Fed’s stimulus plan dashed hopes for more aggressive steps to boost the world’s top economy.

An unexpected rise in U.S. crude inventories last week also hit Brent, which has slid 28 percent from this year’s peak above $128 touched in March.

The Federal Reserve on Wednesday extended until yearend its current programme of selling short-term bonds and buying longer-dated ones to bring down borrowing
costs, instead of launching a third round of outright bond purchases.

While Fed Chairman Ben Bernanke said the U.S. Central Bank was ready to do even more to help an increasingly fragile U.S. recovery, many investors hoping for a third round of quantitative easing which would have boosted investment flows into riskier assets, like oil, were disappointed.

“In addition to the technical weakness of the market, the weak FOMC action has put more downside pressure on prices,” said Ken Hasegawa a commodity sales manager at Newedge Japan.

“The U.S. economy is not in good shape. You add Europe and a poor demand-supply situation and the picture gets much worse. I can’t see any support for crude prices now, it’s all very bearish.”

Brent crude for August delivery fell 51 cents to $92.18 per barrel by 0557 GMT, after falling to as low as $91.98, the weakest since December 20, 2010. Front-month U.S. crude was down $1.09 cents at $80.36 per barrel, after earlier hitting an eight-month low of $80.39.

China’s factory sector contracted for an eighthstraight month in June with export orders seen at the weakest since early 2009, according to the HSBC Flash Purchasing Managers Index, the earliest monthly indicator of China’s industrial activity.

“Obviously any indication that the Chinese economy is slowing more than expected will put further pressure on oil prices and commodities,” said Michael Creed, an economist at National Australia Bank.

A further cooling of the Chinese economy would add more pressure to oil markets, particularly since the world’s second-largest economy has been a key driver of demand with economies in Europe and the United States struggling.

Nonetheless, without being as stifled by politics, China is seen as better equipped at dealing with a slowdown if need be.

“Unlike the U.S. or Europe, the Chinese government has more tools at its disposal to stimulate the economy, they’ve certainly got a lot of money sitting in reserves,” Creed said.

“In Europe and the U.S., interest rates are very low, there is little room for fiscal and monetary policy because of politics. The only thing which they can fall back on is QE, which is not the most effective.”

Poor demand and swelling U.S. crude inventories have built up the supply cushion in the world’s biggest market to levels not seen since 1990.

U.S. crude oil stockpiles rose last week by 2.86 million barrels, defying forecasts for a 1.1 million barrel decline, according to data from the U.S. Energy Information Administration.

(Source : REUTERS)

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