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Oil prices take a hammering

Crude oil plunged yesterday, recording its biggest loss for two years, with an influential US job report, due out later this afternoon, likely to extend the drop

Crude oil plunged yesterday, recording its biggest loss for two years, with an influential US job report, due out later this afternoon, likely to extend the drop.

The market blamed yesterday’s price plunge on worsening economic conditions, government budget tightening and automated selling triggers for the plunge. The US Labor Department is due to release its job report at 1300 GMT, giving traders further insight into the health of the world’s biggest economy.

Brent crude oil fell to a session low of $109.02/b, down $12.17 or 10% on the day. US WTI oil ducked below $100/b for the first time since March.

Other investors said that it appears the market has peaked, citing the multi-billion dollar flotation of Glencore, the world’s largest commodities trader. They compared the Glencore initial public offering (IPO) with the IPOs of Goldman Sachs and private equity group Blackstone which marked the peak of their respective markets.

“Oil prices fell $10 dollar due to a mix of bad economic numbers and stop selling triggers,” Thorbjørn Bak Jensen, oil market analyst at Global Risk Management, said.

Yesterday US Labor Department unemployment data showed weekly jobless claims hitting eight-month highs, while in Germany industrial orders fell unexpectedly in March. In China’s quarterly monetary policy report, the central bank said there was no ceiling to how high the cash reserve requirements may go, as the country fights to control inflation. Raising the cash reserve requirements for Chinese banks would reduce lending and slow the economy.

Stop selling triggers – which automatically sells oil at a certain price to stop losses – may have exacerbated the fall, with a large number triggers levels likely to be set at roughly the same range.

The European Central Bank’s likely decision not to raise interest rates in June also pushed the US dollar up – and therefore oil down as it is often used as a hedge against a falling dollar – with rates expected to stay unchanged at 1.25%.

Other analysts believe the fall in crude means oil is now closer to reflecting supply and demand fundamentals.

“The underlying short-term bear story remains,” Malcolm Graham-Wood, oil analyst at VSA Capital said. He cited Saudi Arabia’s comments that the markets were awash with oil and US gasoline prices breaching $4/gallon ahead of the usually high demand driving season as reasons behind the huge correction.

Prices continued to fall on early Friday trading, with Brent just below $109/b and WTI at $97.5/b, but some analysts believe prices may be oversold and could rebound very quickly.

“This is a buying opportunity when you have exposure on oil. The present level on oil prices has been created due to a high amount of speculators being run over by each other. We expect a rebound in the coming weeks and see price at 115 at the end of the month,” Global Risk Management’s Jensen said.

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