Oil bears emerge amid euro fears

For the second time in two years, oil price bears have emerged from their dens to push crude sharply lower. By dropping more than 20 per cent from an 18-month high reached this month, crude officially entered bear territory last week. On Thursday, the last day of trading for the June futures contract, crude for delivery next month fell as low as US$64.24 in New York. That was nearly 26 per cent below the May 3 peak of $87.15.

Crude for July delivery has also fallen. In New York on Friday, the contract closed at $70.08 a barrel, down more than 2 per cent on the day, marking its fifth consecutive daily decline. This month's steep price drop is raising fears of a repeat of the scenario that played out from late 2008 to February of last year, when crude fell below $35 a barrel. Analysts broadly agreed this month's descent was driven by growing fears that the Greek sovereign debt crisis would trigger another recession, rather than supply-demand reasons.

"This is about fear, risk and watching your back," Martin King, the vice president of institutional research at Canada's FirstEnergy Capital, said in a research note. "In this kind of environment, getting cash for assets and hunkering down is the norm." In a report issued on Friday, Germany's Commerzbank said investors feared the recently announced euro-zone fiscal consolidation measures would "sharply curb economic growth and oil demand in Europe".

While the outlook for oil demand in industrialised countries remains uncertain, crude inventories are significantly higher than average, at 59 days of forward cover for members of the Organisation for Economic Co-operation and Development instead of the normal seasonal level of 50 days. Stockpiles at Cushing, Oklahoma, the key delivery centre for the benchmark West Texas Intermediate crude, have risen over the past 15 weeks to a record 37 million barrels. That means crude has room to fall even lower, analysts said.

Recently, OPEC ministers have sent mixed signals about whether the group will again take action to stabilise the market. Last week, the Algerian energy minister Chakib Khelil said there was no role for OPEC to play yet. "As soon as the market realises that the (euro zone) mechanism which has been put in place is going to work its way through and resolve the economic situation, you are going to see the prices go back up," Mr Khelil said on Wednesday.

But earlier in the week, Qatar's energy minister Abdullah al Attiyah said OPEC needed crude to remain above $70 a barrel to support investment in oil development. OPEC's next scheduled ministerial meeting is in October in Vienna. [e-mail]