Oil Retreats from Seven-Week High as Demand Concerns Grow
Crude prices slipped from recent highs after weak economic signals from China and lower profit forecasts for European companies raised doubts over fuel demand.
Oil prices fell back from a seven-week high on 17 July 2012, as concerns over weakening demand in China and a downbeat outlook for European corporate profits led traders to take profits after a five-day rally.
The retreat followed a period of strong gains, with New York crude futures having advanced for five consecutive sessions. That run, the longest since April, had pushed oil to levels not seen since late May. The sudden reversal came as traders responded to signals that global economic growth may be faltering, particularly in China and Europe.
China and Europe weigh on sentiment
China’s Premier Wen Jiabao warned that the country’s labour situation is deteriorating rapidly, adding to concerns that the world’s second-largest economy is losing momentum. Chinese economic data had already pointed to slower growth, and oil traders are sensitive to any sign that demand from major importers could soften.
In Europe, analysts revised down their profit forecasts for companies in the Euro Stoxx 50 Index. More than 12,000 estimates indicated that, by year-end, profits would rise by 6.8%, a figure that disappointed some market participants expecting a more robust recovery. The combination of weak economic signals from China and Europe undercut the case for further gains in oil prices.
Technical signals and profit-taking
Traders cited technical indicators as another reason for the pullback. For the first time since March, the 30-day stochastic oscillator for New York oil futures surpassed 70, a level often interpreted as showing that prices have risen too quickly and may be due for a correction. After five days of gains, some investors opted to lock in profits rather than risk a reversal.
The price of oil for August delivery settled at $88.59 a barrel in New York electronic trading, down 0.7% from the previous session. Brent crude for September delivery dropped 0.8% to $103.22 a barrel on the ICE Futures Europe exchange in London. Both benchmarks had rallied strongly in the previous week but lost ground as economic worries returned to the fore.
Implications for fuel prices and the auto sector
For carmakers and suppliers, the oil price retreat could offer some relief from recent cost pressures. If crude prices stabilise at lower levels, it may ease input costs for manufacturers and moderate fuel expenses for consumers. However, the underlying cause, a weaker global economy, remains a concern for vehicle sales and production volumes, particularly in export-oriented markets such as Europe and China.
The latest drop in oil prices follows earlier swings linked to geopolitical events and supply news. For context on previous price movements, see Oil prices: Oil again below $99 as Saudi offers more crude.
