Near NYMEX crude oil futures are traded down more than 1% on
Monday as low as $91.25/barrel while Brent was off nearly $2.00 per
barrel as traders took a "risk off" stance on uncertainty over
economic activity in Europe. Crude oil prices rallied on Friday in
London and New York but fell in late Asian trading on Monday after
a weekend disagreement between German Chancellor Angela Merkel and
French President Francois Hollande over the start of bank oversight
raised new doubts about a resolution of the European debt crisis
and the outlook for the European economy. "It's all EU related,"
said Julian Brigden of Macro Intelligence 2 Partners. "People are
far too bulled up and complacent."
Crude oil has been especially volatile in recent weeks. Traders
bought crude last week on the hope that a resolution of the debt
crisis in Europe will increase economic activity and demand for
oil. This weekend's argument between the leaders of France and
Germany has popped that hopeful bubble.
Press reports out of Asia indicate that growth in China is
slowing down faster than previously thought. Widespread protests
over a territorial dispute with Japan have disrupted production at
many Japanese-owned factories in China while the ongoing leadership
transition has suffered a few bumps along the way which have
increased the overall level of uncertainty in China. This has added
to negative sentiment on oil.
Finally, Reuters reported on September 18 that the United
Nations Conference on Trade and Development (UNCTAD) has called for
governments to directly intervene in commodity markets to "pop
price bubbles, prevent crashes and combat powerful financial
investors" following the flash crash in crude oil prices on
September 17. The UNCTAD report argues that position limits, such
as those imposed by Dodd-Frank in the U.S., are not sufficient to
prevent excessive commodity price volatility. This, too, has made
But it is not all bad news for crude oil bulls. On the political
front, Iran continues its saber-rattling rhetoric against Israel
and the United States. Bloomberg reports that CNN will air an
interview with Iranian President Mahmoud Ahmadinejad later today in
which he said that Iran will defend itself if attacked by Israel,
which could disrupt the flow of oil through the Persian Gulf.
Some analysts argue that fundamentals inevitably point to higher
crude oil prices despite today's short-term dip. Bernstein Research
published a report earlier this month in which they state that the
higher production costs of unconventional crude oil from shale in
the U.S. or oil sands in Canada will continue to put upward
pressure on crude oil prices. Low production cost, conventional
crude production is near capacity-even in Saudi Arabia-so it is the
marginal barrel of oil produced from high-cost, unconventional
sources that sets the long-term price of crude oil. Bernstein
estimates that the marginal cost of a barrel of oil is $92.
Near NYMEX futures are traded below $92 this morning. If
Bernstein Research is right, the longer oil stays below $92, the
more producers of unconventional oil in North America will be
thinking about reducing production to curb losses. Longer dated
contracts remained above the critical $92/barrel mark on NYMEX but
these too have been sold off sharply today.
United States Oil Fund (NYSE:
), the NYSE listed crude oil ETF has gapped down at the open today
and continues to trade lower following the bearish sentiment in the
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