Singapore: Oil dropped as much as 1.8% on Friday, erasing this week’s gain to two-year highs, as concerns about Irish debt sent investors scrambling for the safety of the dollar, unwinding positions across commodities.
US crude for December fell as much $1.56 to $86.25 a barrel and was down $1.29 at $86.52 at 10:40am, after touching an intra-day peak of $88.63 on Thursday, the highest prices since October 2008.
Attention in the oil market refocused on risk aversion and macroeconomic concerns at the end of a week when price action was dominated by the fundamentals of crude, with Chinese demand at a record and US inventories plunging.
The dollar gained 0.2% against a basket of currencies on Friday as the euro tumbled to a six-week low against the US currency, shedding about 2.6% this week on fears Ireland may need a bailout just like Greece.
“It’s just a correction after the big rebound the euro had against the US dollar,” said Ken Hasegawa, a commodity derivatives manager at Japan’s Newedge brokerage.
“The big issue is the worries about Ireland’s economy. It seems to be worse than expected, and that is the reason why the euro is falling. In addition, technically some selling orders have been triggered across all commodities.”
US crude’s Relative Strength Index (RSI) edged up to 67.74 at the close on Thursday, approaching the 70 level that is usually interpreted as a signal the market is overbought and subject to a price correction.
Traders slowed their selling of euros a bit on Friday after knocking the currency down 4 cents in the past week, squaring up before a statement about Ireland that may be issued by Britain and France later in the day.
“We saw big gains in the euro and commodities as well, then it is not so surprising if the market goes down suddenly,” Hasegawa said. “If some bad news comes into the markets, prices will fall again.”
Concerns about Ireland overshadowed a Group of 20 leaders’ summit in Seoul, where a breakthrough on resolving global economic imbalances amid incongruent policies looked unattainable.
Oil had rallied for most of the past two weeks, partly on signs that the Organization of the Petroleum ExporTing Countries (Opec) can tolerate higher oil prices and on a plan by the US Federal Reserve to buy $600 billion in Treasury bonds to help speed economic growth.
China’s industrial production grew 13.1% in October from a year earlier, sending oil usage in the world’s second biggest consumer to a record 8.92 million barrels per day (bpd).
Chinese demand was fueled mainly by a record refinery throughput of 8.72 million bpd, up 12.2% from a year earlier, government data showed on Thursday.
“The similarities with crude oil in the second half of 2007, when prices moved from $75 to $100 a barrel, are manifold,” JP Morgan analysts led by Lawrence Eagles said in a weekly report.
“Rampant emerging market growth, Opec reluctant to raise output, and policy shifts and price caps in China leading to regional shortages.”
But “one big difference between 2007 and 2010 is that there is no question that Opec has the spare capacity to hike crude oil output next year - and could quash this nascent rally in its tracks.”
Opec, which meets in Quito, Ecuador, on 11 December, in a monthly report released Thursday raised its forecast of global oil demand next year by about 310,000 bpd to 86.95 million bpd, and increased its estimate of consumption this year by around 190,000 bpd, to 85.78 million bpd.