Featured # Markets | 3 years ago

Oil Prices Drop Due to Economic Concerns

On Monday, oil prices began to drop because of two reasons. First, financial problems arose in Europe as well as Asia. On top of this, the currency value of the American Dollar shot up (1.2% increase from June yearly lows). As a result, imports of oil from other countries became more expensive. Therefore, U.S. crude oil shot down 55 cents and is now at $48.52 a barrel. Additionally, Brent Crude Oil Futures fell from $50.02 per barrel to $49.80 a barrel (a 52 cent drop). To add on to the drop of oil prices, Carsetn Fritsch – Commerzbank Analyst – will have to decide later this month on whether or not to leave the European Union. His departure can lead to more of a drop on oil’s recent gains.

“The most recent oil price increase was driven by bullish market sentiment,” Fritsch said. “A Brexit could turn market sentiment around.”

With the rising strength of the U.S. Dollar, many have concerns over the economic strength in Asia; specifically China, due to its over capacitated workforce and increasing debt. The European Central Bank stated that drop in oil prices over the past two years would contribute less to global growth than previously believed resulting in even a negative impact. Seconding this statement the OPEC, who originally thought the world oil market would be better in the second half 2016, warned there is “still a massive supply overhang”. As a result, many Oil traders have already shorted many of long positions that have profited from the double in crude prices since hitting all-time decade lows.

“Oil may be looking healthier than it has in a very long time, but it is not yet out of the woods,” was written in a note from Barclays.

In spite of this, many analysts still believe oil demand in Asia and specifically China still remain firm.This is belief comes from the increase in automobile sales in China rising 2.1 million units in May (9.8% increase). China Association of Automobile Manufacturers stated on Monday, that this was strongest year-on-year growth since December 2015. Moreover, the sales were up 7.0% in the first five months of 2016. Energy Consultancy FGE stated, “against the backdrop of low international oil prices, Chinese crude oil demand will remain well supported this year as demand continues to gain traction from stockpiling activities and refining use.” The FGE “expect[s] Chinese crude oil imports to grow by 730,000-760,00 bpd this year.

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