Crude prices slide as EU forecasts a fall in economic growth rates

06-Apr-05

Crude oil prices dropped by almost US$1 a barrel as the European Union forecast a cut its economic growth rate and traders took profits from a recent run-up to new highs. Aiding this slide was a statement by Federal Reserve that market forces would eventually bring oil prices under control, as high prices would spur more energy production and conservation. Light, sweet crude fell to settle at US$56.04 a barrel on the New York Mercantile Exchange. Brent crude futures fell to US$55.44 a barrel on the International Petroleum Exchange in London. This indicates a fall of over a dollar as compared to prices on Monday, when Nymex crude for May had climbed to an intraday record of US$58.28 and Brent rose above US$57. As record peak oil costs weigh heavily on the economies of European nations, the European Commission cut its 2005 growth forecast for the second time in six months. Slow economic growth in Europe will ease demand for crude, pushing prices downward. Growth in Europe will slow to 1.6% this year, less than the 2% predicted in October and down from 2004's rate of 2%. However, demand from Europe is just one component of global demand. The oil market has always been U.S.-centric, and U.S. demand appears to be still going strong. Slow growth in Europe and Japan has also boosted the U.S. dollar in the past weeks, making commodities that are priced in U.S. dollars, such as oil, more expensive for buyers outside the United States. This usually dampens demand for crude and sends prices down. Talks are on in OPEC about a possible half-million bpd increase to the cartel's output quota, depending on exactly how prices behave in the next two weeks. Any production increase would occur in May, as OPEC is exceeding its current production ceiling of 27.5 million bpd by about half a million bpd.