Crude oil futures retreated again Tuesday, falling for the second straight day amid rising anxiety about the global economy.
In a sign that the lift from last week's round of quantitative easing may have run its course, front-month oil futures on the New York Mercantile Exchange closed at $95.29 a barrel, down $1.33, or 1.4%, from Monday. Brent oil futures slid $1.76 to $112.03 a barrel.
The drop came amid a fresh wave of anxiety about the euro zone and as U.S. economic bellwether Federal Express cut its profit forecast. Aside from those bearish factors, oil traders reacted to reports Saudi Arabia plans to keep output high, analysts and traders said.
Prior to this week's trading, most market watchers had been girding for oil to pierce $100 a barrel given the news last week of further quantitative easing by the U.S. Federal Reserve and ongoing political strife in Syria and throughout the Middle East. But Monday's decline, which included a sudden drop of $3 in a minute, coupled with Tuesday's outcome, suggested the oil market has returned to a more cautious stance.
"The euphoria of the Fed decision has been reversed, and the focus has shifted back to the euro zone," said Matt Smith, an analyst at Summit Energy.
The market is giving more credence to an emerging bear case for oil which rests on an increase in Chinese-Japanese tensions, doubts about Spain's well-being and anxiety about continued global economic weakness.
At the front of the market's attention Tuesday was renewed headlines about Spain. The Spanish government succeeded Tuesday in selling 4.57 billion euros ($5.99 billion) of short-term debt, but the yield on Spain's 10-year government bond, a key measure of borrowing costs, is again hovering around 6%, a level that is considered economically unsustainable. The Spanish government has so far sent mixed signals on whether it will accept the economic and budgetary conditions that would be attached to any bailout.
The euro weakened 0.6% against the dollar, a decline that also lends downward pressure to oil, which is priced in dollars and typically trades in inverse fashion to the dollar.
Also Tuesday, analysts and traders were stirred by a disappointing warning from FedEx Corp., which trimmed its full-year profit guidance and cut its forecasts for global and U.S. economic growth next year.
John Kilduff, a trader at Again Capital, said the FedEx comments were further evidence of an increasingly gloomy economic outlook. Tuesday's decline in oil, following the sharp selloff Monday, is "confirmation that the selloff, while violent yesterday, was for real in terms of how oil's trading now," Mr. Kilduff said.
Market watchers also cited evidence that global oil supply would stay high. A senior Gulf source said Saudi Arabia is working to lower oil prices and is producing 10 million barrels a day, Reuters reported.
Analysts and traders continued to scratch their heads on the cause of Monday's move, but most saw light trading volume as a factor.
"You had a combination of a holiday, an expiration of options and negative market sentiment," said Ray Carbone, who works from the Nymex pits with Paramount Options. "It's a move which happened on the worst day possible, which is an illiquid day."
Front-month October reformulated gasoline blendstock, or RBOB, settled at $2.90 a gallon, down 4.43 cents. Heating oil futures settled at $3.127 a gallon, down 3.63 cents.
Copyright (c) 2012 Dow Jones & Company, Inc.
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