Supply Gains Soften Crude Oil Prices

This week, markets may experience some softening on current crude oil prices due to a more positive supply scenario. China, the country with the second largest economy in the world, is expected to bounce back in terms of economic activity.  Meanwhile, a meeting of minds will have to transpire soon to prevent further U.S. budget contractions.

According to a weekly market survey, 50 percent of respondents project a drop in crude oil prices this week.  The other half predict that oil prices won’t move that much.

The “fiscal cliff” in the U.S. will remain one of the highlights this week unless Congress acts fast enough to arrest negative repercussions that would be triggered by massive tax expansions and budget cuts. Market analysts revealed that “fiscal cliff” issues drained investor appetites a week ago.

Nevertheless, a senior member of the Republican Party expressed high hopes that U.S. officials will be able to deal with this scenario before it’s too late.  A White House aide also implied that the President may be open to some concessions regarding the decision to raise taxes imposed on high net worth individuals.

Cumberland Advisors Chairman and CIO David Kotok said that he is getting a better view of the political picture now that the recent political “follies” of the election season have started to fade.

On the other hand, reports reveal that industrial and business activity in China did shoot up last month, a good sign that the Chinese economy is finally waking up from a near economic slumber which lasted for more than a year. According to Orb Global Investments Chief Economist Clifford Bennet, the country is again trudging towards the road to increased viability.

Oil traders believe that officials have somehow brought economic and financial issues under control; however, low demand for crude, coupled with a very comfortable supply level, will certainly affect the crude oil price per barrel.

Based on recent reports from the Energy Department, U.S. oil production went up to 6.7 million bpd, an increase of 8,000 bpd – a record high since mid-1990s.

Brent crude traded at $109.21 per barrel for December, a drop of almost 20 cents.  For the same period, crude futures traded at a little over $86 per barrel in the Asian trade market.

Barclays Capital Chief Strategist for the Asia-Pacific region, Dhiren Sarin, said that U.S. equities will always have influence on crude oil and other risk commodities.  Shortly after the Obama win, Standard and Poor 500 stock index plunged as expectations of a fiscal cliff “face off” strengthened.

Sarin disclosed that crude oil will rebound along with a stronger index at the S&P500.  Nevertheless, it is widely believed that this week is going to be a “bear” period for oil.

By: Chris Termeer