Crude continues to lose big

Prices drop by almost $3 on demand concerns from Europe and US

Crude prices ended substantially lower on Tuesday, 05 August, 2008 as the dollar strengthened and demand concerns fuelling from slower economic growth in US and Europe. Prices closed below $120 level for the first time in three months. Oil prices also fell as Tropical Storm Edouard was unlikely to have disrupted oil and natural-gas facilities in the Gulf of Mexico.

Crude-oil futures for light sweet crude for September delivery closed at $119.17/barrel (lower by 2.24 or 1.8%) on the New York Mercantile Exchange. Futures earlier fell to an intraday low of $118 a barrel. Last week, crude prices ended higher by 1.5%. But it has lost 4.8% since last Friday. Crude lost $15.92 (11%) in July, 2008, the biggest ever in dollars. It's now $28 lower than the $147.27 record high hit last on 10 July, 2008.

The July Institute of Supply Management (ISM) Services report indicated that business conditions aren't as weak as widely reported, although conditions are still not ideal. The reading rose to 49.5 from 48.2 in June, which topped the average estimate of 48.8. Since the reading is below 50, it reflects contraction in the services sector and this is what fuelled worries among traders.

Also a report showed that European retail sales declined by the most in at least 13 years in June. Surge in oil and food costs left consumers with less money to spend on other goods.

These reports fuelled concerns that forthcoming demand for oil and crude products from the largest consumer of oil, US and Europe might be dampened in the forthcoming months and hence prices slipped today.

Crude prices gained 38% in the second quarter of this year. It was the biggest quarterly increase in nine years. It ended June 2008 higher by 9.9%. Prices are 52% higher than a year ago. For the year, crude is up by 26% till date.

At the currency markets on Tuesday, the dollar reached a seven-week high against the euro on speculation that the Federal Reserve will raise its benchmark interest rate later this year to contain inflation. Fed kept the interest rate unchanged at 2% today.

Today, The Federal Open Market Committee (FOMC) left the fed funds rate at 2%, and the discount rate at 2.25%, as expected. The Fed noted that there are both risks to inflation and growth. The FOMC said that although the US economy grew in the second quarter, labor markets have "softened further" and financial markets remain under "considerable stress." The Fed gave no sign that it plans to change policy in the foreseeable future. The dollar index, a measure of the greenback against a trade-weighted currency basket, was at 73.92, against last closing of 73.485.

Against this background, September reformulated gasoline slid 4.4 cents, or 1.5%, to close at $2.9564 a gallon, and September heating oil dipped 6.8 cents, or 2%, to end at $3.282 a gallon.

Natural gas was little changed today, erasing an earlier advance, amid speculation a slowing U.S. economy will cut demand for the industrial and heating fuel. Natural gas for September delivery was unchanged to settle at $8.726 per million British thermal unit.

At the MCX, crude oil for August delivery closed at Rs 5,057/barrel, lower by Rs 69 (1.3%) against previous day’s close. Natural gas for August delivery closed at Rs 370.7/mmbtu, higher by Rs 0.8/mmbtu (0.1%).