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Oil and gas whacked in global market bloodbath

The meltdown of global financial markets struck oil and gas shares as well as commodity prices yesterday, with no let-up in the bloodbath in sight as trade opened today

At time of writing, in London, Brent crude was trading at $107.40 a barrel on Ice, down by around 4.5% over the past 24 hours. US WTI had dropped by nearly 6%, to $86/b over the same timeframe.

Global investors have piled into safe havens – such as gold, the Swiss franc and the Japanese yen – in response to market uncertainty, and are fleeing riskier assets such as oil and gas.

“The flight to quality has seen equities, bond yields and oil prices dropping like a stone. Market fear from the beginning of the financial crisis now seems to have returned – further drops cannot be ruled out,” said Thorbjørn Bak Jensen, oil analyst at Global Risk Management.


 

Share prices in oil and gas firms also took a battering, with the FTSE World Oil and Gas Index falling by nearly 10%, to $393.22 over the course of a week.

Smaller firms bore the brunt, with Gulf Keystone Petroleum – listed on London’s Alternative Investment Market (Aim) – opening 21% lower, at 111.75 pence today compared with yesterday’s opening price. Encore Oil was also down, at £0.45 a fall of 24%; while fellow Aim-listed Rockhopper Exploration collapsed by nearly 47%, to 145.25 pence.

But the supermajors also took a hit, with BP down by 2.7%, at £4.06 and Shell dropping by 8.2% to £19.35.

Global slump

Worldwide, stocks have fallen for eight consecutive days following continued fears over eurozone debt and slowing economic growth. Investors are worried about the global economy after a slew of purchasing-manager surveys showed manufacturing was declining in the US, Europe and China.

There are also fears that the last-minute US debt-crisis deal – which promised to cut public spending to reduce the country’s $14 trillion deficit – may also hinder growth.

“Businesses see no reason to expand given the lack of consumer demand. And thanks to that deficit obsession, government, which could and should be supporting the economy in its time of need, has been pulling back,” said Paul Krugman, professor of economics at Princeton University. “Plunging interest rates and stock prices say that markets aren’t worried about either US solvency or inflation. They’re worried about the US’ lack of growth,” he wrote in a New York Times column published today.

The US economy grew by a tiny 0.4% in the first quarter and modest 1.3% in the second quarter, government figures showed earlier this week.

In Europe, meanwhile, investors are worried about Italy and Spain defaulting after the European Central Bank gave no clear assurances that it would buy the countries’ debts. Earlier in the week, the Centre of Economics and Business Research (CEBR) said Italy was “bound to default”, but that Spain may escape.

Although Italy runs a tight budget and plans to eliminate its deficit by 2014, stagnant economic growth means the debt is unlike to be reduced, it added. The CEBR also claimed Italy's debt would rise from 128% of annual output to 150% by 2017 if the cost of debt stays at present levels and growth remains anaemic. On the other hand, Spain’s debt is not expected to climb to more that 75% of national output.

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