Crude oil prices plummeted on Thursday as demand destruction fears and a surprise decision by the European Central Bank to not raise interest rates took more life out of the commodities trade. The only action in oil prices this week has been down and Thursday's plunge was being viewed by some as the knockout blow.
The price of crude oil declined by 7%, or close to $7.60, and was recently trading at $101.64. Brent crude was also down by 7% and trading at $112.06 early on Thursday afternoon. On Wednesday, the U.S. crude oil price had dropped below the key technical level of $111, and traders had said that a further move down back to the area of $104 couldn't be ruled out.
Goldman Sachs and other commodities heavyweights were out on Thursday saying that demand destruction had finally supplanted geopolitical risk as the driving force in the oil trade. However, the dollar bounce with the surprise ECB decision may have weighed as heavily on oil prices, traders say. Demand destruction signs are creeping into the picture, too, but it may still be too soon to call a fundamental shift in the oil prices debate.
Phil Flynn PFG Best market strategist wrote on Thursday, "We are starting to see the first real signs that high energy prices are beginning to hurt. As if we needed more evidence. Yesterday's big drop in the ISM non-manufacturing number and the weak ADP jobs report seems to suggest that high energy prices are starting to really take a toll. We are seeing a situation where business may hold back on hiring as they are stunned by the spiraling cost of oil, gas and diesel that continue to rise to a shocking level."
The end of the Federal Reserve's second quantitative easing program (QE2) is also an event that the PFG Best strategist alluded to in commenting on a "QE2 malaise" in the market. "Is the US economy going back into a pre QE-2 Malaise?" Flynn asked.
Yet traders were wary of reading too much into demand destruction on a day when the European Central Bank surprised the markets with a signal that it would not raise rates. The dollar weakness has been one of the key supports for the rising price of oil, and the ECB move led to the dollar bounce that some traders have feared has the most short-term power to sink oil prices.
The euro was down close to 2% versus the dollar on Thursday.
European Central Bank head Jean-Claude Trichet said on Thursday that the bank was not likely to raise interest rates again soon, and the euro suffered its worst day of the year. The ECB head said bank would "monitor very closely" all risks to inflation, a change in previous language that signaled more interest rate hikes.
For Phillip Silverman of Kingsview Capital, the dollar bounce and not demand destruction was the issue to watch on Thursday.
"Everyone has been on the same side of the trade, short the dollar and long the commodities trade. Now with a little bit of a dollar bounce, everything reverses and risk is taken out of the trade," the managed futures advisor said.
Yet Silverman isn't bullish on the dollar, and in fact, viewed the huge decline in oil prices as a reason to reconsider buying into the oil trade. "The dollar will get a bounce, but I don't think fundamentally the situation has changed. In fact, I think this gives people the chance to look at getting long exposure in oil,"' Kingview Capital's Silverman said.
Traders were weighing just how quickly the demand destruction could arrive, even if they were not willing to call the end of geopolitical risk on Thursday.
PFG Best's Flynn noted, "while demand driven commodity inflation rages across the developing world, it seems that in the U.S. demand is weakening. That has been evident in weakening gasoline demand that cannot now be attributed all to lousy weather. It looks as if the U.S. is headed into another summer of subpar growth, similar to the type of summer we had when Fed Chairman Ben Bernanke announced QE 2. In other words, if growth continues to falter we could see QE 3 and it is possible that gasoline price that is hitting record highs in Chicago and Indiana could be the catalyst."
"I do expect that at some point we will see demand destruction," added managed futures advisor Silverman, but the trader doesn't believe it's the rising oil price, but the U.S. economy growing less than expected that will serve as the real trigger. He pointed to the fact that growth expectations declined to 1.8% from 3%. "It will overtake the fear trade and dollar trade, but I'm not sure if we are there yet. I still think the most overwhelming factor is the weak dollar,"' Silverman said.
Traders said with oil declining back near the $100 mark, it could be a reasonable level to start dipping back in. Traders conceded that on Thursday the oil priced dropped right through the $104 to $105 support level without any show of support. On the other hand, traders pointed to the fact that from the time oil started moving up strongly in February when the Middle East situation surfaced, oil prices went from the mid-$80 range to $114.
"That's a long way up and it's natural to see this reversal with so many people on the same side of the trade shorting the dollar,"' the Kingsview Capital manager Silverman said, who was adding to oil exposure on Thursday after the big slide. "My feeling is that with oil down by more than 10% over the past four days, there is an opportunity for trading,"' Silverman said, noting from the time oil first hit $100, it took another month for the trade to gain 10%.
Nonetheless, from a technical perspective, the last time the price of oil sank below the $104 to $105 range, the next support level was in the mid-$90 area.
Energy stocks continued to sell off for the fourth day this week, with the sector down more than 1.6%, while the major indexes declined by less than half a percentage point.
Chevron(CVX), ConocoPhillips(COP), andExxonMobil(XOM), were all down by more than 1%.
The soaring profits reported last week by Big Oil have not helped the stocks. In fact, ConocoPhillips, which showed operating weakness amid the rising oil prices and better refinery margins, is down 7% since it reported last week. ExxonMobil, which had the best earnings of the U.S. oil majors has declined by half that level or 3.5% since its earnings.
The major U.S. independent energy companies had been beaten up this week, after earnings reports fromChesapeake Energy(CHK), Anadarko Petroleum(APC) and Marathon Oil(MRO) were overshadowed by the big commodities selloff and energy sector decline. Some of that bleeding ended on Thursday, with Chesapeake Energy one of the few exploration and production companies gaining, though only slightly, on the day.
A notable winner on another big losing day for energy stocks was Transocean (RIG), with the rig operator providing a very bullish commentary on the outlook for its business after its earnings report, more or less saying there wasn't a spot of weakness in its rig opportunities around the globe. Transocean shares were up by 2% even as the energy sector led the market decline for another day. However, for Transocean shares the action on Thursday was a bit of a relief rally, with shares having declined 14% over the past month.
The price of crude oil declined by 7%, or close to $7.60, and was recently trading at $101.64. Brent crude was also down by 7% and trading at $112.06 early on Thursday afternoon. On Wednesday, the U.S. crude oil price had dropped below the key technical level of $111, and traders had said that a further move down back to the area of $104 couldn't be ruled out.
Goldman Sachs and other commodities heavyweights were out on Thursday saying that demand destruction had finally supplanted geopolitical risk as the driving force in the oil trade. However, the dollar bounce with the surprise ECB decision may have weighed as heavily on oil prices, traders say. Demand destruction signs are creeping into the picture, too, but it may still be too soon to call a fundamental shift in the oil prices debate.
Phil Flynn PFG Best market strategist wrote on Thursday, "We are starting to see the first real signs that high energy prices are beginning to hurt. As if we needed more evidence. Yesterday's big drop in the ISM non-manufacturing number and the weak ADP jobs report seems to suggest that high energy prices are starting to really take a toll. We are seeing a situation where business may hold back on hiring as they are stunned by the spiraling cost of oil, gas and diesel that continue to rise to a shocking level."
The end of the Federal Reserve's second quantitative easing program (QE2) is also an event that the PFG Best strategist alluded to in commenting on a "QE2 malaise" in the market. "Is the US economy going back into a pre QE-2 Malaise?" Flynn asked.
Yet traders were wary of reading too much into demand destruction on a day when the European Central Bank surprised the markets with a signal that it would not raise rates. The dollar weakness has been one of the key supports for the rising price of oil, and the ECB move led to the dollar bounce that some traders have feared has the most short-term power to sink oil prices.
The euro was down close to 2% versus the dollar on Thursday.
European Central Bank head Jean-Claude Trichet said on Thursday that the bank was not likely to raise interest rates again soon, and the euro suffered its worst day of the year. The ECB head said bank would "monitor very closely" all risks to inflation, a change in previous language that signaled more interest rate hikes.
For Phillip Silverman of Kingsview Capital, the dollar bounce and not demand destruction was the issue to watch on Thursday.
"Everyone has been on the same side of the trade, short the dollar and long the commodities trade. Now with a little bit of a dollar bounce, everything reverses and risk is taken out of the trade," the managed futures advisor said.
Yet Silverman isn't bullish on the dollar, and in fact, viewed the huge decline in oil prices as a reason to reconsider buying into the oil trade. "The dollar will get a bounce, but I don't think fundamentally the situation has changed. In fact, I think this gives people the chance to look at getting long exposure in oil,"' Kingview Capital's Silverman said.
Traders were weighing just how quickly the demand destruction could arrive, even if they were not willing to call the end of geopolitical risk on Thursday.
"I do expect that at some point we will see demand destruction," added managed futures advisor Silverman, but the trader doesn't believe it's the rising oil price, but the U.S. economy growing less than expected that will serve as the real trigger. He pointed to the fact that growth expectations declined to 1.8% from 3%. "It will overtake the fear trade and dollar trade, but I'm not sure if we are there yet. I still think the most overwhelming factor is the weak dollar,"' Silverman said.
Traders said with oil declining back near the $100 mark, it could be a reasonable level to start dipping back in. Traders conceded that on Thursday the oil priced dropped right through the $104 to $105 support level without any show of support. On the other hand, traders pointed to the fact that from the time oil started moving up strongly in February when the Middle East situation surfaced, oil prices went from the mid-$80 range to $114.
"That's a long way up and it's natural to see this reversal with so many people on the same side of the trade shorting the dollar,"' the Kingsview Capital manager Silverman said, who was adding to oil exposure on Thursday after the big slide. "My feeling is that with oil down by more than 10% over the past four days, there is an opportunity for trading,"' Silverman said, noting from the time oil first hit $100, it took another month for the trade to gain 10%.
Nonetheless, from a technical perspective, the last time the price of oil sank below the $104 to $105 range, the next support level was in the mid-$90 area.
Energy stocks continued to sell off for the fourth day this week, with the sector down more than 1.6%, while the major indexes declined by less than half a percentage point.
Chevron(CVX), ConocoPhillips(COP), andExxonMobil(XOM), were all down by more than 1%.
The soaring profits reported last week by Big Oil have not helped the stocks. In fact, ConocoPhillips, which showed operating weakness amid the rising oil prices and better refinery margins, is down 7% since it reported last week. ExxonMobil, which had the best earnings of the U.S. oil majors has declined by half that level or 3.5% since its earnings.
The major U.S. independent energy companies had been beaten up this week, after earnings reports fromChesapeake Energy(CHK), Anadarko Petroleum(APC) and Marathon Oil(MRO) were overshadowed by the big commodities selloff and energy sector decline. Some of that bleeding ended on Thursday, with Chesapeake Energy one of the few exploration and production companies gaining, though only slightly, on the day.
A notable winner on another big losing day for energy stocks was Transocean (RIG), with the rig operator providing a very bullish commentary on the outlook for its business after its earnings report, more or less saying there wasn't a spot of weakness in its rig opportunities around the globe. Transocean shares were up by 2% even as the energy sector led the market decline for another day. However, for Transocean shares the action on Thursday was a bit of a relief rally, with shares having declined 14% over the past month.
