Oil prices dropped sharply on Friday as two important headlines relieved supply worries and toned down demand expectations. U.S. West Texas Intermediate (WTI) futures fell 2.7% but closed at $70.35 per barrel, while the global benchmark Brent crude fell by 2.3% to $73.87 a barrel. The declines followed slumping fears of a Gulf of Mexico supply disruption from Hurricane Rafael, and this had to be joined by dismay over China’s newest round of economic stimulus, which was deemed too weak by many analysts to boost oil demand.
Energy producers in the U.S. Gulf of Mexico had suspended some 23% of their oil output ahead of Hurricane Rafael, which has already slapped Cuba. However, by Friday, updated forecasts indicated that the hurricane would probably stay anchored in the Gulf without enhancing its threat to offshore production facilities. The National Hurricane Center downgraded Rafael to a Category 2 storm, easing fears of protracted outages for the region’s oil producers.
Meanwhile, China’s largest oil importer failed to meet investor expectations when it finally unveiled its long-awaited economic stimulus package. China’s authorities also announced measures purposed to help local governments reduce debts, but the package did not include measures directly targeted at boosting demand. Analysts said that China’s economy showed signs of deflationary pressures and weak oil demand as customs data showed six consecutive months of declining crude imports through October. This muted reaction added to the pressure along the downside trajectory of oil prices, especially since the slowdown in economic growth in China had been prolonged.
Putting aside the losses of the day, oil markets have maintained some level of strength. Prices rose by more than 1% every week due to continued hopes that the U.S. may impose more stringent sanctions against Iran and Venezuela, capable of curbing global supply. Hope for better economic activity and, in turn, higher energy consumption has also contributed to some slight support for energy prices after the Federal Reserve of the U.S. cut the rate by one-quarter of a percentage point on Thursday.
Conclusion:
Traders in both markets were caught off guard by Friday’s oil price fall, but the move also underscored the vulnerability of oil markets to supply disruptions and demand signals from major world economies. With Hurricane Rafael now weakening and Chinese economic troubles still, commodity traders may be looking for oil prices to stabilize or continue trending lower throughout the balance of the week. Geopolitical developments and potential policy actions from major world economies are likely to be key factors to watch on the road ahead for global oil prices in the near term.
Source: Reuters