Crude sheds gains

Prices drop on demand concerns

Crude oil pared early gains and ended lower at Nymex on Tuesday, 11 May 2010. Long-term implications of the European Union's rescue package and its impact on the currencies, specially on the euro, bothered investors and raised question about global demand for oil in coming months. Agencies increasing their forecast for global oil demand perhaps restricted crude's losses.

On Tuesday, crude-oil futures for light sweet crude for June delivery closed at $76.37/barrel (lower by $0.43 or 0.6%). Prices hit a high of $77 during intra day trading. For the month of April, crude rose 2.8%. For the first quarter of this year, crude rose by 5.5%. Year to date, crude is higher by 1.7%.

Prices are very much lower as compared to 3 July, 2008 settlement of $145.29 a barrel and an intraday high of $147.27 on 11 July, 2008, an all-time high. However, oil has also gained nearly 144% from a December 2008 nadir. That day prices settled at $33.87 a barrel following an intraday low of $32.40.

A decision by the European Union and International Monetary Fund leaders to pledge financial support to the eurozone brought about a wave of buying and short covering that caused the stock markets across globe to surge in its best single-session percentage gain in more than a year yesterday. As per plan, countries in the eurozone that face financial uncertainty will be eligible to receive some 500 billion euros from the EU and another 250 billion euros from the IMF. In addition to those measures, the European Central Bank will buy eurozone bonds from the secondary market and the Federal Reserve has reactivated swap lines with foreign institutions. At least for the time being, those efforts have eased contagion concerns that have surrounded Greece for weeks.

But traders mulled over the fact today that in the long term how much financial aid will be pledged for eurozone countries that face tenuous fiscal conditions and also the issue of how those funds will be allocated efficiently and whether recipients can remedy their underlying problems. The long term implication of this on the euro also bothered investors.

In the currency market today, the euro dropped 0.9% against the dollar. The dollar index, which measures the strength of the dollar against a basket of six currencies, rose by 0.4% today. The euro has slipped 11% against the dollar this year.

Also on Tuesday, the U.S. Energy Information Agency raised its outlook for global oil demand to 1.6 million barrels per day in 2010, slightly higher than the 1.5 million barrels-a-day projection made last month. The EIA will release its more closely watched data on inventories at 10:30 a.m. on Wednesday.

Separately, The Organization of the Petroleum Exporting Countries also said on Tuesday it was raising its estimate for global oil demand for 2010. OPEC expects global oil demand to grow by 950,000 barrels a day to 85.38 million barrels a day. It previously expected growth of 900,000 barrels a day.

Among other energy products on Tuesday, natural gas for June delivery fell 4 cents, or 1% at $4.13 a million British thermal units while heating oil for June settled 2 cents higher, up 0.9%, at $2.14 a gallon.

Crude ended FY 2009 higher by 78%, the highest yearly gain since 1999. It reached a high of $82 earlier in October 2009 and hit a low of $33.98 on 12 February 2009. Crude prices had ended FY 2008 lower by 54%, the largest yearly loss since trading began at Nymex.

At the MCX, crude oil for May delivery closed higher by Rs 12 (0.34%) at Rs 3,460/barrel. Natural gas for May delivery closed at Rs 187.4, lower by Rs 1.8 (0.95%).