Oil Market Update (June 26, 2012)

Oil fell below $79 a barrel on concerns about Europe’s economic and financial situation. However, the drop was limited somewhat by a supply disruption from a storm that shut down approximately a quarter of the Gulf of Mexico’s crude output.

In London, Brent crude for August delivery was down 97 cents at $90.01 a barrel on the ICE Futures Europe exchange.

By early afternoon on Monday, benchmark oil for August delivery was down 85 cents at $78.91 a barrel in trading on the New York Mercantile Exchange.

Crude has plunged from $106 in less than two months amid indications of lagging economic growth and decreased oil demand from Europe and China.

Investor attention will be focused on a European Union summit this week; France, Germany, Italy, and Spain have agreed to push for a growth package worth up to $167 billion aimed at spurring the region’s weakening economy.

Capital Economics expects Brent crude to fall as low as $70 per barrel over the next 18 months.

“The main downside risk to oil prices comes from the crisis in the eurozone, which we do expect to worsen,” said a Capital Economics report. “However, after such precipitate declines in oil prices, it would not be surprising to see a small, albeit temporary, bounce.”

“Global oil consumption is still expected to grow this year – albeit by a relatively weak 1 percent – not contract as it did in 2008 and 2009,” said Caroline Bain, commodities analyst at the Economist Intelligence Unit.

Energy producers’ stocks are suffering, primarily due to growing economies, high levels of fuel demand, and increased oil and natural gas production, a recent Bloomberg study suggests.

The study also indicates that the MSCI World Energy Index – a free-float weighted equity index – has gone down by 9.6 percent this year, a larger decrease than any other group.

Bloomberg believes that this divergence highlights the fact that as energy consumption has grown, supply has made even larger gains. Crude inventories in the US are at their highest levels in over twenty years, while natural gas prices have dropped 38 percent over the last year due to a supply glut caused by hydraulic fracturing.