London: Brent crude fell by more than $3 to below $118 a barrel on Thursday, as fund managers and traders pulled money from across the commodities sector as concerns about interest rate rises and demand destruction began to bite.
At 4:05PM, Brent crude futures for June were down $2.97 to $118.22, after dipping to an intraday low of $117.75. US crude for June was down $2.55 to $106.69 a barrel.
Oil had been trending down all morning following bearish inventory data from the US and discouraging economic indicators, but the real selling kicked in when Brent crashed through an important technical level at $120 a barrel.
“It’s a bit of an exodus,” said Rob Montefusco, an oil trader at Sucden Financial.
A trader with a major bank said much of the selling, which was mirrored in base and precious metals, could be attributed to fund managers pulling out of commodities as the end of the second round of quantitative easing in the US loomed.
“People won’t sit and wait until the end of June until the official bond buying programme ends,” the trader said.
Michael Hewson, an analyst with CMC Markets, said concerns about higher interest rates and demand destruction were taking hold across the commodities complex.
“China and India are going to be taking a much more aggressive view with respect to inflation at the expense of a short-term fall back in growth,” he said. “That’s pushing oil prices and commodity prices in general lower.”
Hewson added there was also some nervousness ahead of the European Central Bank rates meeting later on Thursday.
ECB President Jean-Claude Trichet’s news conference will be closely followed for any use of the phrase “strong vigilance.”
This would be taken to signal a rate rise in June rather than July, which is the market consensus.
Analysts and traders added bearish inventory data from the US Energy Information Administration on Wednesday had hit the oil price.
Weekly US crude oil stocks rose by 3.4 million barrels even as imports fell, contrary to analysts’ expectations for a 2 million-barrel gain.
“The EIA numbers did not help the bulls,” said Edward Meir, a senior commodity analyst at MF Global in the United States.
Oil was also weighed down by economic data showing a sharp slowdown in the services sector and less hiring by private companies in April, indicating a sputtering recovery in the world’s largest economy.
“We are beginning to see the impact of high oil prices on oil demand and on the economy,” said Christophe Barret, an energy analyst at Credit Agricole.
“All the indicators we got yesterday were pretty low, and the demand numbers from the EIA were pretty low too.”
The data does not bode well for a key labour report on Friday, one of the most closely watched US economic indicators.
According to technical charts, Brent crude is forecast to fall further to $119.03 per barrel, while US crude futures are headed to $107.52, said Reuters market analyst Wang Tao.