Crude oil drops below US$80 on renewed economic concerns

07-May-10
Over the past 3 days, crude oil futures on the Nymex have lost more than six dollars a barrel, dropping below US$80/barrel for the first time since mid-March. As per Chemorbis, crude oil prices have pushed lower as confidence in the global market has been shaken by debt troubles in Europe and renewed efforts to tighten monetary policy on the part of China’s Central Bank. After opening the week at US$86.19/barrel, crude oil prices lost over nine dollars in the next three trading days to settle at US$77.11/barrel on Thursday as investor confidence in the global markets was rocked by ongoing protests in Greece, concerns over possibly debt problems in Spain and Portugal as well as news that the Chinese Central Bank has announced its third reserve rate increase of the year in order to counteract what the Bank considers to be excess speculation in the Chinese property market. Greece’s debt problems have continued unabated this week despite the recently approved €110 billion EU/IMF rescue package. Investors have expressed concerns that this current package, while easing Greece’s short-term funding issues, will not be enough to put the government’s finances back onto a sure footing, especially as the government has not yet specified what items it intends to cut from its budget and is facing mounting popular resistance to its planned austerity measures, leading some investors to speculate that the government may have lost control of the situation. Investor confidence in the euro has been further shaken by concerns that fellow eurozone countries Spain and Portugal might soon find themselves in a public debt crisis closely resembling the one that has recently enveloped Greece. These difficulties in the eurozone pushed the euro to below US$1.28 vs the dollar, the furthest the common currency has fallen since March of 2009. As crude oil is often held as hedge against the US dollar, the inverse relationship between the strength of the dollar and crude oil prices also contributed to crude’s recent slide on the market. Recent interest rate increases in Australia and Norway have also contributed to the dollar’s upward momentum on global markets. Another factor contributing to skepticism about the health of the global economy is the fact that China’s Central Bank has recently raised its reserve requirements for member banks for the third time this year, with sources attributing the Bank’s actions to its desire to keep speculation on the country’s property market in check. The Chinese government is also said to be considering further measures to dampen property speculation over the short term, including proposals to implement a general property tax. Taking their cue from the government’s desire to cool down the market, equities traded on the Shanghai Composite Index tumbled 4.1% on Wednesday.
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