Oil Drops Below $60, May Continue to Plummet
Down 10% this week alone, crude oil fell again in trading on the New York Mercantile Exchange, settling below $60 for Friday's close. With dismal numbers emerging on the state of the economy, traders have retreated from buying oil, with prices plummeting over the last two weeks.
Closing out the week's trading, Crude oil settled on the NYMEX Friday at $59.89 a barrel. This is a major decrease in the price of the commodity, with oil closing above $71 just 10 days ago.
"The market can't get any traction because the economic news continues to be very, very weak right now," said Phil Flynn, vice president in charge of research for PFG Best in Chicago.
While the price of oil buoyed slightly yesterday to close with a 27-cent gain, crude closed 52 cents lower today, landing below the psychological $60 mark.
"There are not a lot of reasons to want to be long on oil," Flynn said. "People were buying oil a couple of months ago because they were worried about inflation; but if inflation isn't an issue and the economy is stalling, there's another reason not to buy oil."
Negative economic news continued with a report from the EIA today reflecting a decrease in demand for oil in 2009, although the agency did see a 1.7% increase in demand for 2010.
"People wanted to buy oil because they thought the economy was improving," Flynn continued. "They were buying oil because they thought there were green shoots, but the green shoots are withering, and the economic news is soft."
While there existed some hope that the economy was recovering, the analyst believes that that hope has dried up.
"That's being reflected in the way oil prices have retreated so dramatically in the last few weeks," he added.
Stimulus Not Meeting Expectations
Ultimately, stimulus money being distributed by US President Obama and his administration has not affected the economy as dramatically as investors had hoped.
"It's because the stimulus money, though helpful, is not getting to the system fast enough and it's not being spent in the right place," Flynn expounded. "They put too much money in long-term projects, as opposed to putting money back into the hands of small businesses where it would have had the most effect."
While long-term projects are needed to help the American economy, the analyst argues that a boost to small businesses would be more widely and immediately felt.
"The problem right now is small businesses are struggling -- they don't want to lay people off, but they don't have much of a choice," Flynn continued. "The money needs to go to the people who create the jobs, and the money is not getting there. Until it does, we're going to have a hard time getting out of this recession."
How Low Will It Go?
The price of oil has been on a rollercoaster ride ever since the commodity's $147 peak in July 2008. After a mind-numbing fall to the low $30s over the coming months, oil experienced a major rally in 2009. Peaking in mid-June at near $73 a barrel, crude oil has been suffering a decent since then that has gained steam in the last two weeks.
"It looks like we could get back into the $30s unless things change," warned Flynn. "This looks very similar to what we saw last year when prices were at $147 a barrel, and everything hit a brick wall and prices fell. It seems like we're hitting a similar brick wall."