Oil’s comeback effort was short lived as the positive trend that was present in the commodity markets this week reversed today with crude moving down to hit fresh seven month lows after stock markets got toppled by Germany’s regulatory move.
Germany has decided to ban the so-called naked short selling, a practice of selling without owning or borrowing the financial instrument, of certain euro-denominated assets to add to the fears over the European debt crisis that has been keeping markets under pressure for months. Euro zone states have recently established a massive €750 billion rescue fund for countries with soaring sovereign debts that could find themselves in a situation similar to that of Greece, which had to request a multi-billion euro bailout from the EU and the International Monetary Fund (IMF) to avoid bankruptcy. Spain and Portugal and possibly Italy could be the next states to fall.
The jitters over Europe’s fiscal crisis have caused a massive firesale in global equity markets that led to the downfall of leading stock market indexes. This was followed by a recovery that took place last week and continued into this week before the ban was introduced. Main stock market indexes in the US plunged by more than 1% after rising in early trade, while the UK’s FTSE 100 lost more than 2% on Wednesday. The Dow Jones Industrial Average is currently projected to shed another 1% in today’s session.
The euro hit four year lows against the US dollar to further push down crude prices. A stronger greenback makes dollar-denominated commodities such as crude more expensive for holders of other currencies.
Oil prices got some help from yesterday’s inventories report from the American Petroleum Institute (API), which showed an unexpected decline in US crude stockpiles of nearly 0.8 million barrels, while an increase was expected. A more closely watched inventories report from US Energy Information Administration is due out today.
July Brent Crude slid to US$73.62/barrel, while US light, sweet crude for July delivery slipped to US$71.98/barrel on the New York Mercantile Exchange (NYMEX).
Blue chip oil and gas producers were in decline today. BP (LSE: BP) posted a small loss, while fellow supermajor Shell (LSE: RDSB) shed 1.5%, as did BG Group (LSE: BG). Other FTSE 100 constituents Cairn Energy (LSE: CNE) and Tullow Oil (LSE: TLW) declined 2% and 3% respectively.
Engineering firms Amec (LSE: AMEC) and Petrofac (LSE: PFC) slipped 2.7% and 4.6% respectively.
Midcaps followed. Dragon Oil (LSE: DGO) and Premier Oil (LSE: PMO) lost nearly 1%. Salamander Energy (LSE: SMDR) and Dana Petroleum (LSE: DNX) were down 3%, while Heritage Oil (LSE: HOIL), JKX Oil & Gas (LSE: JKX) and Soco International (LSE: SIA) lost more than 3.5%. Melrose Resources (LSE: MRS) was at the bottom of the pile with a 5.5% decline.
Services companies Wood Group (LSE: WG) and Wellstream Holdings (LSE: WSM) lost more than 4%.
Most junior companies also were in decline. Peru, Colombia and Cuba operating oil and gas explorer and producer Gold Oil (LSE: GOO) and US focused oil and gas junior Caza Oil & Gas (AIM: CAZA) dropped 11% and 9.5% respectively. Iraq and Algeria operating Gulf Keystone Petroleum (AIM: GKP) and Mongolia-focused Petro Matad Ltd (AIM: MATD) were down 7.5% and 6.5%. Western Europe operating oil and gas company Northern Petroleum (AIM: NOP) and Irish oil and gas exploration company Petroceltic International (AIM: PCI) lost nearly 6%.