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NYMEX crude oil prices tumbled to 3-month lows on Fri [14 May 2010] at the end of a volatile week in which the market was hit by eurozone economic concerns and a strong dollar. NYMEX light sweet crude for Jun 2010 delivery closed at $71.61 per barrel. The price had tumbled to $70.83, the lowest level since Feb 2010, before recouping some of its losses. Prices fell when American crude stockpiles rose by 1.9 million barrels, more than double the amount forecast by analysts. Crude oil prices had already collapsed by more than 10% last week as the market was rocked by euro contagion fears about the Greek debt crisis, a stronger dollar and sliding global stock markets.
The oil market had begun the week on a bright note, soaring on Monday after a $1-trillion EU-IMF eurozone rescue plan eased market concerns over the eurozone financial crisis. However, prices have since fallen as market enthusiasm waned for the massive bailout plan, while concern grew about higher Chinese inflation that could slow global economic growth. Oil also took a major hit from a stronger USD. The EUR/USD forex rate tumbled under 1.24 on Friday, plagued by concerns about debt and deficits in the eurozone. The IEA cut its projection for global oil demand this year in the face of public finance pressures in Europe that could drown recovery "in an ocean of public debt."
- What a difference a few weeks make. When earlier, oil prices were hitting local maximums of over $87, the prognosis was for economic recovery and there was talk about crude oil options going into the $90's and $100's, but then oil failed to reach those levels when the euro crisis hit. The euro contagion fear has been driving, among other things, the huge Dow 1000-point fall, a flight of safety into bonds and treasury instruments, and it has taken oil down $13 in 2-3 days and now oil prices are down in a waterfall-like drop of over $16 in a matter of a week or so.
A huge fall, but now I am looking at the next possible support levels being $70, $65 and $60 respectively. In comments I made to fellow investors earlier this week, I noted the following : meanwhile oil is down and gold is up. When I issued the "sell everything call", it was way early but I did manage to sell off [much of my risk holdings]. So far, -1 for buying back oil though nobody could have predicted the Dow 1000 meltdown and $13 oil fall, +1 for buying back gold on an an up trend and breaking new records. By breaking below $80, oil is now on track to hit the $70 support level and if that fails $65 and $60 are next supports. Remember though that tar sands operations, a critical energy source now that light sweet crude has peaked worldwide since May 2005, start turning unprofitable below $80 and start outright shutting down below $60 so we could have some support there.
In the big scheme of things, the contrarian community has already worked out a road map on the transition from a sovereign debt crisis to a currency crisis, which we are now witnessing. The next few stages could be even uglier and it's not just me saying that. If the world continues to go in the same direction, we are headed for bankruptcies, defaults, interest rate surges, and possibly worse. $60-70 oil could look like pretty decent prices then.
See also :
1. NYMEX crude oil prices drop below $79 as Euro falls against USD on Greece concerns
2. China crude oil imports exceed 50% of total consumption, hits energy security alert level
3. Watch the Euro
4. NYMEX crude oil prices surge above $86 to 17-month high on economic recovery
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