Daily Comments
Oil slips below USD 75 as ISM disappoints and Earl abates
06.09.2010 9:21:00
Oil prices ended the week lower for the third time in four weeks. Light, sweet crude for October delivery fell 42 cents, (0.56%), to settle at USD 74.60/bbl, having traded intraday from USD 73.20 to USD 75.44. London Brent crude for October dipped 26 cents, (0.34%), to settle at USD 76.67/bbl, after trading from USD 75.33 to USD 77.46.
Oil prices eased Friday as weak US service sector data rekindled worries about slowing economic growth, while a weakened Hurricane Earl posed less of a threat to refineries near its path. Nonetheless Hurricane Earl's path off the US East Coast was still likely to dampen holiday driving and fuel demand. Hurricane Earl weakened to a Category 1 storm as it moved up the US eastern seaboard toward Canada. But even as the storm approached, the EIA noted that bulging inventories would dull any impact from refinery capacity being shut.
Crude prices moved higher in early trading after a report showed US employment fell for a third straight month in August, but declined far less than expected and there was an unexpected rise in private sector hiring. However, prices began a slump toward session lows after an Institute for Supply Management report showed the US non-manufacturing sector rose an eighth straight month in August, albeit at a slower pace than July and at a rate below expectations. The US dollar fell against a basket of currencies and was weaker against the euro.
On the equities front, the broad S&P 500 index closed its best week in eight after recent economic data, including a stronger-than-expected labor market report, bolstered optimism that the economy would not slide back into recession. The strength of equities based on expectations of future economic growth as the recovery progressed has helped bolster oil prices and kept the focus off high US oil inventories, tepid demand and the global spare production capacity.
Meanwhile, economist Nouriel Roubini (nicknamed Dr. Doom) told Reuters Insider Television he believed things could get worse in the United States in the second half of the year and economic growth could go below 1%. "Even if it is not technically a double dip recession, it is going to feel like a recession," Roubini claimed.
Friday's US data arrived ahead of a long weekend and today's US Labor Day holiday is traditionally viewed as the end of the summer driving season.
Moving forward, with the summer driving season winding down we expect that lower gasoline prices will push oil prices lower. That said, we think crude futures will be more impacted by equity markets - driven by macroeconomic data - than market fundamentals per se. In the upshot, we could see oil trade down a dollar or so unless some strong economic data help prop up crude prices.
