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Mon 20 Sep 2010 09:56 AM

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Oil market summary: Consumer worries drive down prices

Renewed concern about deflation sent oil prices into the doldrums last week.

Oil market summary: Consumer worries drive down prices
(Getty Images)

Flagging consumer sentiment and renewed concern about deflation sent oil prices into the doldrums last week, as prices dropped 1.2 percent on Friday to close the week down 3.6 percent.
            
The benchmark West Texas Intermediate futures contract settled at $73.66 a barrel on Friday, down 91 cents on the day, compared to $76.45 a week ago.

A pair of bearish statistics on consumer sentiment and inflation drove down crude oil prices on Friday.

The Reuters/University of Michigan consumer sentiment index declined to 66.6 in September from 68.9 in August. Forecasters had been looking for a slight rise in the index. The decline indicated that weak demand would continue to plague the US economy.

Meanwhile, the Commerce Department reported that core consumer prices, excluding food and energy, were flat in August. Even with the volatile food and energy prices, the CPI was up only 0.3 percent in the month.

The core CPI has risen only at an annualized 0.7 percent this year, as economists warn that anything below 1 percent poses an immediate threat of deflation. A deflationary spiral is considered harmful to an economy because it creates a vicious cycle of lower wages, lower demand and negative growth.

On top of everything else, a leak in a key pipeline that brings oil from Canada to refineries in the Midwest United States was repaired, easing supply shortages that had nudged prices upward. Closure of the pipeline pushed futures up to a close of $77.19 a barrel on Monday.

It was all downhill after that. Even Wednesday’s report the US crude oil inventories had declined 2.5 million barrels in the week, slightly more than expected, provided little respite to the downward pressure on prices.

Oil prices have been stuck in a range of $70 to $80 a barrel for months, and OPEC’s secretary general, Abadalli El-Badri, reiterated again this week that the oil exporting group is happy with this price.

On Friday, Credit Suisse analyst Edward Westlake cut his forecast for oil prices next year to $72.50 a barrel from $80 a barrel previously. According to the Associated Press, Westlake believes that global supply conditions will keep prices in check.

By Darrell Delamaide for OilPrice.com

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