Oil prices drop by over two dollars, closing above US$78

15-Oct-08

As the market exhilaration that international bank rescue efforts will aid recovery of global financial markets subsided, oil prices dropped by two dollars on concerns about the shape of the global economy. New York's main contract, light sweet crude for delivery in November settled at US$78.6 in New York, and London's Brent North Sea crude for November delivery dipped to US$74.53. Monday saw a 3.5 dollar recovery in oil prices from one-year lows of Friday. Though steps taken by the US government seem to be in the right direction in trying to unlock the credit freeze, crude oil is estimated to record significant gains only when there is unlocking of the demand freeze. It seems that at this point of time, global investors are finding more buying opportunities in equities than in commodities. Despite the new found buoyancy in stock markets, most of the advanced economies are expected to fall into recession due to credit restrictions, falling housing prices and deteriorating consumer spending. Another factor that goes against oil markets is the strengthening dollar. When the dollar fell, oil prices rose, as the dollar-priced crude is cheaper for buyers with stronger currencies and therefore tends to stimulate demand.