Oil prices down 13% last week as financial markets turn toxic

The oil market is undergoing a ‘correction’ in prices and prices are being set by ‘market force’, UAE Minister of Energy Mohammed bin Dha’en Al Hamili told journalists in Qatar yesterday ahead of a conference hosted by the Organisation of Petroleum Exporting Countries that opens in Doha today.

Last week oil prices fell by 13 per cent, the biggest fall since December 2008 at the height of the global financial crisis. Oil hit an 18-month high of $87 a barrel on May 3rd and closed on Friday at $75.

Oil inventories up

For all the talk of a recovery in the United States oil inventories there are 5.4 per cent above seasonal normal levels, the highest ever recorded, and unemployment is up from 9.7 to 9.9 per cent. And the mounting Greek debt crisis in Europe is likely to reduce demand for oil.

Industrial commodities generally get sold off alongside stocks when global financial markets turn down, and the performance of oil last week as markets weakened significantly suggests it will be no different this time around. Only gold and silver as precious metals rather than industrial commodities have held up well so far.

Oil dropped to an 11-week low last week. Analysts think a fall of another $15 is possible if this weakness continues, and the down pressures that are weighing on global financial markets right now are considerable.

Aside from the Greek debt crisis that threatens a renewed recession across Europe, there is the UK political crisis after its inconclusive election and a surprise downturn in Chinese manufacturing.

Double dip recession

For the Gulf States a lower oil price threats to delivery a double dip or W-shaped recession with renewed weakness in general business activity, particularly in trading and logistics. Lower oil prices act with roughly a six-month time lag on general business activity.

How low oil prices will go is always one of the toughest calls for forecasters, and large oil companies always avoid making any public predictions. That said in a renewed major global financial crisis a wild swing to the downside would probably be unavoidable.

For investors looking to buy oil company stocks at attractive prices that would likely be a major opportunity. For any financial turmoil would doubtless be met by even greater public spending that will boost demand for oil and cause inflation.