Oil slumps on surprise IEA move, global economic woes

23rd June 2011, Comments 0 comments

Oil prices tumbled Thursday after the International Energy Agency agreed to draw on emergency reserves to make up for lost Libyan supplies and as global economic gloom sparked fresh demand fears.

New York's main contract, West Texas Intermediate (WTI) for delivery in August, dived nearly $6 to hit an intraday low of $89.69 a barrel -- a level last seen on February 21.

Brent North Sea crude for August sank more than $8 to $105.72 in late afternoon London deals, plumbing a low last witnessed on May 6.

"The IEA totally surprised the oil market today and shocked investors after deciding to supply ... 60 million barrels of oil in an attempt to drive crude oil prices lower," said Sucden analyst Myrto Sokou.

"It was very much unexpected and following Fed chairman Ben Bernanke's comments about a weaker US economic outlook, prompted investors into a heavy sell-off."

The Paris-based IEA announced that its member countries will draw 60 million barrels from their strategic oil stocks in the next month after unrest cut supplies from Libya.

"This supply disruption has been underway for some time and its effect has become more pronounced as it has continued," the IEA said in a statement.

The IEA, the energy arm of the Organisation for Economic Cooperation and Development, has repeatedly called on OPEC to pump more crude to prevent high oil prices threatening the global economic recovery.

But the 12-nation Organization of the Petroleum Exporting Countries (OPEC) -- which pumps 40 percent of global oil supplies -- opted earlier this month to maintain its output levels.

The sharp falls also came after data showed new signs of weakness in the US employment market and after the Federal Reserve reduced its economic growth forecast for 2011.

New claims for US unemployment benefits unexpectedly climbed last week as the struggling economic recovery leaves employers reluctant to hire, official data showed Thursday.

Initial jobless claims rose to 429,000 in the week ending June 18, an increase of 9,000 from the prior week, the Labor Department said. The increase was unexpected; the average analyst estimate was for claims to fall to 413,000.

"Increasingly soft economic numbers and rising sovereign debt concerns are weighing heavily as markets across the globe continue their grind lower," ETX Capital trader Manoj Ladwa said.

"While equities fall on reduced speculation of an expansion of the Federal Reserve's stimulus spending program, oil is sharply lower as the IEA looks to release up 60 million barrels."

Oil had rallied sharply on Wednesday, as news of tumbling US crude and gasoline reserves sparked hopes of resurgent demand in the United States, the world's biggest oil consuming nation.

However, the market hit reverse gear on Thursday as the Fed downgraded its US growth outlook while downbeat Chinese manufacturing data sparked concerns over the Asian powerhouse economy.

The dollar won support after the Fed confirmed that its second round of bond-buying will end later this month -- signalling that there would be no further stimulus measures.

A stronger US unit makes dollar-priced commodities more expensive for buyers using weaker currencies. This tends to dent demand and weigh on prices.

Traders also took their cue from disappointing news from China, which is the world's leading consumer of energy.

Growth in China's manufacturing activity fell to an 11-month low in June, preliminary HSBC data showed.

HSBC's preliminary purchasing managers index fell to 50.1 in June from a final reading of 51.6 in May, showing the sector barely grew as authorities tightened restrictions on bank lending.

A reading above 50 indicates the sector is expanding while a reading below 50 indicates contraction.

© 2011 AFP

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