Crude price fluctuations independent of demand-supply fundamentals

18-Feb-10

Since the beginning of the month, crude oil prices have been fluctuating in the range of US$71-77/barrel. A look at the daily price fluctuations mostly shows that developments in the global financial system are impacting crude oil prices rather than real supply-demand dynamics, as per Chemorbis. In the first week of February, sovereign debt concerns in Europe caused equity markets to plummet, sending the dollar soaring against the euro. The ongoing fiscal crisis in Greece, Spain and Portugal pulled the euro down to 1.36-1.38 against the US dollar from the record high exchange rates of 1.51 seen in early December. The disappointing rate of US unemployment in January also contributed to the losses. In the following days, the euro-dollar exchange rate continued to fluctuate on the speculations that the European Union would help dept-laden Greece stabilize its fiscal position before it hit as low as 1.35 on February 12. On the same day, China announced raising its bank reserve requirements to prevent its economy from overheating. Accordingly, crude prices on the Nymex fluctuated in line with the changes in currency and equity markets since foreign investors tend to use oil futures as a hedge. As the US markets were closed due to the President’s day on Monday, the first trades of the third week of February were made on Tuesday, when futures settled US$2.88 higher at US$77.01/barrel on NYMEX. As the Greek Finance Minister said his country is ahead of its deficit-reduction targets and won’t require a bailout from the European Union, the euro cancelled some of its earlier losses and rose back to 1.36. Hence, the relatively weaker dollar caused crude futures to post their biggest gain in more than four months on February 16 along with the strength in equity markets. As of February 17, futures fluctuated around US$77/barrel again before closing the day higher again at US$77.33/barrel. Needless to say, downstream players are closely watching the movements of crude oil. Particularly in polymer markets, the state of the energy complex is set to impact the outlook next week when Chinese players return to their desks from a week long New Year holidays as it could affect the pace of their restocking purchases.