A Choppy Week for Oil

Includes: OIL, USO
by: Wall Street Strategies

By Conley Turner

The trade in crude oil was very choppy for the week of ended May 13 as the commodity responded to a number of catalysts, including the fluctuating value of the dollar. Benchmark West Texas Intermediate crude for June delivery settled the week at $99.33 a barrel on the New York Mercantile Exchange. Brent crude closed at $114.41 a barrel on the Intercontinental Futures Exchange in London.

Monday saw oil recover some of the losses incurred after the precipitous 15% price drop in the previous week. At the end of that week ended May 6, Benchmark crude for June delivery settled at $97.18 a barrel, registering the biggest 7 day decline in 24 months. Despite the selloff, market participants maintained a positive outlook for global economic growth and by extension, the continued upbeat demand for crude.

Additionally, the negative outlook for the value of the U.S. dollar provided some price support. As the value of the greenback declines, oil and other commodities become cheaper for those investors holding other currencies. Benchmark crude for June delivery settled at $102.55 a barrel on the New York Mercantile Exchange.

On Tuesday, oil fell early in the session as the CME Group imposed new margin requirements on an array of crude-oil contracts. Nonetheless, investors shrugged this news off intraday and the commodity recovered by the close to settle at $103.88 on the New York Mercantile Exchange.

Market sentiment took a decided turn for the worse on Wednesday after the government's Energy Information Agency (EIA) reported that for the prior week, crude oil inventories rose by 3.8 million barrels. That was above the 1.1 million barrels build that was anticipated by the market. Gasoline supplies were also shown to have increased by 1.3 million barrels.

Investor confidence was also shaken by official economic data from China showing that inflation in that country continues to be at elevated levels. For the month of April, China's inflation eased marginally to 5.3% from the 5.4% for recorded in March. The consensus expectation was for 5.2% and therefore prompted investors to surmise that Beijing's stance on monetary policy will likely become more restrictive in the coming months. Should this occur, economic activity in that country will likely be adversely impacted and the demand for energy curbed. As it stands, China is the world's second-largest oil consumer. This news also caused the dollar to rise against a basket of other currencies. Benchmark crude fell $5.67, or 5.8%, to settle at $98.21 on the New York Mercantile Exchange.

On Thursday, crude-oil extended the losses in the early part of the trading session after the release of a report by the International Energy Agency (IEA) warning that the elevated price of oil is destroying demand. The agency cut the estimate for 2011 global consumption by 190,000 barrels per day and pointed out that higher gasoline prices especially in the U.S. appears to be affecting consumer behavior. Oil fell to an intraday low of $95.25 a barrel but recovered due a weaker dollar. Benchmark crude closed up $0.76 cents, or 0.8%, to $98.97 a barrel on the New York Mercantile Exchange.

The last day of the trading week saw a recovery in the dollar driven by global uncertainty. However, the market remained concerned that refinery operations could experience some disruption due to the flooding occurring in the Mississippi River and this provided some support for the price of crude. While oil had been very volatile for the week, trading in the $95 to $104 range, a sustained downside move is still unlikely.