News Column

Oil in a Sharp Dive as Euro Spooks Markets

June 22, 2012

Russell Lynch

Oil pump

The oil price was set for its biggest weekly slump for more than a year today as further alarming signs of the impact of the eurozone crisis on global growth spooked markets.

Brent crude hit an 18-month low of $88.49, putting it on course for a fall of more than 8 percent this week, the steepest since mid-2011.

Since peaking in March at $128.40, the price of black gold is down more than 30 percent.

The sell-off comes against a backdrop of worsening economic news from around the world and a "mini-summit" in Rome as the leaders of Germany, France, Italy and Spain attempt to prop up confidence in the eurozone ahead of a full Brussels summit next week.

But business morale in Germany is at its lowest level for more than two years after falling for the second month in a row during June.

The Ifo survey was the latest in a succession of dire news after US factory output grew at its slowest pace in 11 months and Chinese manufacturers shrank for the eighth month in a row.

The Federal Reserve also cut its US growth forecasts for 2012 this week.

David Morrison, commodities analyst at GFT Markets, said: "The oil market is flagging up real fears of a general economic slowdown in the US, Europe and China.

"If we fall below $88.40 the next resistance level is $80 a barrel."

Oil prices were pushed higher earlier this year by tensions over Iran's nuclear ambitions and a threat by Tehran to close the Straits of Hormuz, a key strategic oil route.

John Hall, energy market analyst at John Hall Associates, said: "There is plenty of oil in the market because the Saudis have been pumping to make up for a shortfall from Iran, and there is a lot of concern about where it is going to go because of the economic situation."

But the steep fall in oil prices at least eases the pressure on motorists facing record petrol costs at the forecourt earlier this year, and is good news for the Bank of England's inflation-watchers. The Bank's official inflation benchmark fell to 2.8 percent in May, partly driven by lower petrol costs.

European leaders will discuss using the region's bailout fund to buy sovereign debt and bring down interest rates for countries like Spain and Italy today, as well as a possible tax on financial transactions. Finance ministers were also meeting in Luxembourg for talks over deeper integration of the eurozone's banking sector and the euro 100 billion (pounds sterling 81 billion) bailout for Spain's banks. The Spanish government yesterday warned its banks could need up to euro 62 billion in extra capital.



Source: (c) 2012 London Evening Standard


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