Oil dips on S&P downgrade and Greece
Brent crude settled at USD 121.61/bbl, falling USD 1.84, or 1.49%, after trading from USD 121.00 to USD 123.66. NYMEX sweet crude for May settled at USD 107.12/bbl, down USD 2.54, or 2.32% after trading from USD 106.54 to USD 109.44.
Oil fell sharply on Monday after ratings agency S&P downgraded its US credit outlook to negative and OPEC ministers said high crude prices could place a major strain on consumer countries' economies. While the agency affirmed the United States' credit rating, Standard & Poor's said there is a risk that policymakers may not be able to reach an agreement on how to tackle the country's long-term fiscal pressures. S&P also pointed out there is a 1-in-3 chance it could cut its long-term credit rating on the United States within two years.
Meanwhile, OPEC ministers raised red flags at a meeting in Kuwait, where Nobuo Tanaka, executive director of the International Energy Agency, reiterated his remarks that if oil prices remained around current levels, they could trigger a recession similar to the one in 2008. Oil came under pressure earlier after Saudia Arabia reiterated over the weekend having cut output by more than 800,000 bpd in March on the back of sluggish demand for its crude. Saudi Oil Minister Ali al-Naimi claimed that the global economic recovery remained "patchy", while his Kuwaiti counterpart added that high oil prices threaten to become an economic burden for many big consuming countries.
US equities tumbled as the S&P action added to concerns about the world's top economy. Equities and oil also felt pressure from another Chinese bank reserve hike over the weekend, the latest move to control inflation that could curb demand growth. Most commodities fell, hit by S&P and concerns over Chinese demand.
Oil investors were already concerned over China's economic growth after another hike to Chinese banks' required reserves on Sunday. The action was aimed at fighting excessive liquidity and high inflation.
The euro posted its biggest one-day decline since November against the dollar as concerns increased that Greece will be forced to restructure its debt and amid growing anti-aid sentiment in Europe. As a result, the dollar index, measuring the greenback against a basket of currencies, strengthened.
The geopolitical factor still remains a lingering threat. Forces loyal to Muammar Gaddafi continued their siege of Misrata and a chartered ship evacuated nearly 1,000 foreign workers and wounded Libyans. Clashes broke out in Yemen, wounding at least 15 people, and thousands demanded the overthrow of Syrian President Bashar al-Assad in escalating unrest. Nigeria was also on investors’ radar screen, as rioting continued in northern cities after a contentious election.
Moving forward, with the recent confluence of negative factors coming from the US, Europe and OPEC we now discern a greater chance of a correction in oil prices. Right now we see the market in wait-and-see mode as investors decide whether to stick to commodities, including crude, bail out or take profit. In the interim, we could see a slight downtrend continue in the coming days, with the possibility of a sharp correction not to be ruled out.
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