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Fri 6 May 2011 12:31 PM

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Oil price continues to drop amid global recovery fears

Brent crude price falls further on Friday, extending the losses suffered on the previous day

Oil price continues to drop amid global recovery fears
Royal Dutch Shell

Oil prices fell on Friday, extending a 10 percent crash the previous day as fears about global economic recovery pushed investors to unwind commodities positions.

"The big drop yesterday has scared the bulls, so now only bears are left," said Thorbjoern Bak Jensen, an analyst at Global Risk Management.

"The instinct is to liquidate. Even if you are a bull, you need to have deep pockets to ride this out," said one Singapore-based trader.

Brent crude shed just over $5 in the early hours of trade but recovered as the dollar dropped, trading around $1.98 lower at $108.82 a barrel at 2.13pm UAE time.

Thursday's drop was the second biggest on record, with Brent down by more than $10. At one point it gave up $12, its biggest one-day fall ever.

US crude futures were $2.34 lower at $97.46 a barrel, up from as low as $95.25 a barrel earlier in the session.

The fall on Thursday was part of a broad rout in commodities, driven by factors including a stronger dollar and weak economic data from Europe and the United States.

"We have now an accumulation of data indicating that prices at $110-plus are not sustainable and are impacting both oil demand and the economy," said Christophe Barret, an analyst at Credit Agricole.

The market focused on the release of US jobs data later on Friday.

US employers probably took on fewer workers in April as high energy prices sapped consumer confidence and led to doubts about the strength of the economic recovery, according to a Reuters survey of economists.

"With Asian funds having liquidated some of their positions, I think we will now see prices stabilising, and even if US jobs data is poor this afternoon, I don't think it will turn out as horrible as yesterday" said a trader with a major bank.

The scale of Thursday's fall left many analysts scrambling for an explanation in the absence of any single factor that appeared to have triggered the sell-off.

"There is no way that daily economic data has the power to cut $10 out of oil in one go, " said The JBC Energy Research Centre, adding "the most important single reason for yesterday's sell-off simply appears to be that a sell-off was due."

Traders also said the slide did not appear to have been caused by any obvious change in the fundamental outlook.

"It seems it's all been driven down since Osama got shot, but I don't see that as particularly bearish myself. I don't see what difference it makes, to be honest," said a trader at an oil major.

Unrest across Arab nations had helped spur investors to pile into oil since the start of the year, driving Brent to a two-and-a-half year high of $127 last month.

"The fear premium is reducing as the memory effect cuts in and people are used to the Middle Eastern situation... Investors think oil has finished its run and are looking for performance elsewhere," said another trader at an oil major.

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