Oil prices Fall Sharply on Strong Dollar and Weak Data by China, Overshadow Libya Concerns

Oil prices dropped by more than 2% yesterday as the bullish streak that has been going on in the oil prices for over a month now, has received a jolt and a reality check over the past few days. The fall in the prices has been mainly due to the concerns of oversupply and also due to concerns over the drop in demand from China which is one of the largest markets for oil in the world and also the engine of Asia which is expected to guzzle up large quantities of oil in the coming years in a bid to boost their infrastructure.

Bullish Streak Broken

Oil prices had been moving steadily higher over the last month or so and from their range lows below the $43 mark, they have been rising slowly during this period and they even managed to blow through the $50 mark a couple of weeks back. But since then, the oil prices have corrected lower and what appeared to be a small correction has turned out to be much deeper than expected.The OPEC had done its best to support the oil prices in its last meeting as it managed to get Nigeria on board to accept the oil production cut deal and it also got Saudi Arabia to agree to cut its production even further.

But the effects of all these moves seem to be wearing off of late as the inventory data from the US continues to be choppy with gains and losses alternating each other over the last few weeks. There have also been supply concerns in recent times and this has led to a halt in the march of the oil prices and we have seen the prices drop from their range highs above $50 to below $48.

Yesterday, we saw the oil prices drop by the highest amount over the last five weeks as the dollar recovered across the board during the course of the day yesterday. The dollar has been hit in recent times due to the disappointing series of economic data from the US, the lower than expected CPI data last Friday being the latest in the series. Also, the dollar seems to be getting little support from the Fed who have left it at the mercy of the market forces and prefer to watch from the sidelines as a matter of policy. In fact, they seem to be happy to let the dollar weaken as it helps to support their economy. But over the last week or so, we are seeing some support for dollar from the traders and this has helped the dollar to recover and the effect of that is beginning to show on the oil prices.

Lessening Dependency on Oil Likely to Pressurise Prices

The oil prices got hit by the strength of the dollar and also due to the fact that the refining output from China dropped the highest over the past 3 years. A combination of these 2 factors seems to have spooked the oil markets and it dropped quite hard yesterday and trades below $48 as of this writing. Though there has been a disruption in the supply from Libya as one of its biggest oil fields has been shut due to security concerns, it seems to have done little to support the oil prices in any manner which continues to trade weakly.

With the rig count in the US continuing to increase on a monthly basis and with many of the non-OPEC producers continuing to push oil production, it seems as though the efforts of the OPEC producers in cutting down on the production might go to waste. Also, with many alternative products also emerging in the market, the energy needs of the various growing economies like China might no longer completely depend on oil alone and this could be one of the reasons why we are seeing the demand coming down in China in recent times.

For the short term, the oil prices can be expected to stabilise just below the $48 region as we find some buying support coming in this region. But this may not last long and it would require another fundamental push on the production or the inventory front to keep the bid under the oil prices. The dynamics of the oil market has changed and that is something that is clear for everyone to see. With the growth of alternate sources of energy, the demand for oil has become that much lesser and it is time that the oil market gets itself used to weak prices and continued efforts from the oil producers to sustain the prices.