Nov 7, 2008

World - Crude Oil prices seen dropping to $50/barrel

MUMBAI: With global stock markets and data releases giving a tame scenario for global growth, crude oil is seen heading towards $50 a barrel.

International benchmark December contract on the New York mercantile Exchange is currently trading near $61, after briefly breaching $60. Domestic November future on MCX is trading closer to Rs 2980 per barrel.

According to Praveen Singh, research analyst, Sharekhan Commodities, weak equity markets as well as negative outlook for global growth are the key factors that give a negative outlook for crude oil prices. “While $62-60 range was seen as a key support, a breach on the downside can take prices further to $50. This could correspond to a price range of Rs. 2500-2450 for domestic prices," he added.

Barring occasional pullbacks, all asset classes including stocks and commodities have largely continued down moves. On Tuesday, December futures rallied as high as $71.77 ahead of the US presidential election result. However, in the last two sessions, prices have given away more than 13 percent as further rate cuts from Bank of England as well as European Central Bank failed to provide any support to negative market sentiment.

“It is evident from the recent data releases that global growth is expected to decline significantly. While this would weigh on crude oil demand, investment demand has also dried out due to the liquidity crunch,” said Harish Gallipeli, research head, Karvy Comtrade.

According to the International Monetary Fund's latest report released on Thursday, it now expects 2009 global economic growth of 2.2 percent, down 0.8 percent from the forecast it gave in October. Prospects for global growth have deteriorated over the past month and developed economies will likely contract for the first time since World War II, it said.

"In this backdrop, international crude oil prices have a potential to decline towards $50 if a support of $55 is breached," said Harish.

Earlier on Monday, the European Commission said that the economic growth in the euro zone is expected to slump to 0.1 percent in 2009. It also said that region's GDP could shrink for three consecutive quarters this year and cut its forecast for full-year 2008 growth to 1.2 percent from 1.3 percent previously. Comments from UK policy makers also continue to reflect that the country might already have entered a recession.

Meanwhile, traders await the release of US October non-farm payrolls later Friday. The employment report is expected to be crucial for financial markets since another decline in the payroll would be a tenth consecutive contraction in the job market of the world's biggest economy. The unemployment rate is also expected to surge further from September's rise to 6.1 per cent, its highest gain in five years.

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