PR: Crude Oil Falls As OPEC And Resurgent Dollar Dampens Enthusiasm
Despite the initial boost from the US jobs report which saw crude oil spike over 2% before falling away on Friday, forex trends have undermined the positive effects of improving US employment, as a resurgent US Dollar pressured the oil price. Comments from key OPEC members re-enforced their view that current oil prices do not reflect fundamental conditions.
In electronic trading, Globex WTI futures have fallen further in Asian and European trading, as contracts were last changing hands around the $75 mark.
Comments emanating from key members of OPEC (Organisation of Petroleum Exporting Countries) left crude investors feeling subdued. Over the weekend, Saudi Oil minister, Ali Naimi described current oil prices as ‘perfect’ for oil exporters, implying no change to output. A number of his OPEC peers have added similar comments, capping bullish enthusiasm in the oil market.
This morning, Mohammed al-Hamli, the oil minister for the United Arab Emirates (UAE) reportedly said that the current oil price does not reflect fundamentals, noting very high stockpiles in the United States. Similarly Qatari Oil minister, Abdullah al-Attiyah re-iterated previous comments and indicated that OPEC production targets would be unchanged in their next meeting.
OPEC has raised concerns over America’s burgeoning stockpiles on a number of occasions in recent months, previously Secretary General Abdallah Salem el-Badri suggested the weak dollar was the primary factor in the crude price.
Despite the perceptions of oversupply and low consumption, Friday’s report from the labor department, spurred hopes that the American economy is continuing to recover. The unemployment rate improved on a month-on-month basis. Non-farm payrolls fell by 11,000 in November, a considerable and unexpected improvement from October’s decline of 111,000. The fall was the smallest drop in employment since the US fell into recession. The US unemployment rate improved to 10% from 10.2% last month.
The data boosted perceptions of resilience in the economy and the dollar began to recover accordingly. The Dollar Index has return above 76pts since approaching lows of 74pts in the past few weeks, the index represents the relative strength of the greenback versus a basket of the 6 other major global currencies.
Typically a stronger US Dollar provides pressures the oil market for two principle reasons. The first is due to the fact that primary commodity market is priced in US Dollars. A stronger dollar directly reduces the relative value of the commodity for investors outside the USA, in simplified terms, the stronger the dollar is, the less of the commodity an investor can buy with the same amount of the stronger domestic currency.
Secondly, investors and traders often purchase commodities such as crude oil and gold as a protection against inflationary forces, a strong US Dollar makes this strategy less rewarding.
Oil and gas stocks mostly declined this morning. Cairn Energy (LSE: CNE) lost 1.2%, while BG Group (LSE: BG) followed with a loss of nearly 1%. Petrofac (LSE: PFC) and Tullow Oil (LSE: TLW) declined marginally, as did BP (LSE: BP), while fellow supermajor Shell (LSE: RDSB) went against the tide, posting a small gain.
Midcaps also were in decline. Dragon Oil (LSE: DGO) was down 1.2%, while Dana Petroleum (LSE: DNX) lost almost 1% and Heritage Oil (LSE: HOIL) posted a marginal loss.
Irish oil and gas exploration company Petroceltic International (AIM: PCI) was the top performer among the juniors, advancing 10.5% after reporting test results from the AT-2 well at its Ain Tsila gas project in Algeria.
