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Crude oil futures - Weekly outlook: June 25 - 29

Published 06/24/2012, 07:02 AM
Updated 06/24/2012, 07:02 AM

Investing.com - Crude oil prices ended Friday’s session higher, as the previous session’s steep decline to an eight-month low created bargain buying opportunities for investors reluctant to bet that prices would fall further amid the possibility of a tropical storm in the Gulf of Mexico.

Despite Friday’s gains, oil ended the week sharply lower amid growing concerns over global economic growth prospects, which in turn have triggered worries over global oil demand.

On the New York Mercantile Exchange, light sweet crude futures for delivery in August settled at USD80.11 a barrel by close of trade on Friday. Earlier in the day, prices fell to USD77.56 a barrel, the lowest since October 5.

On the week, crude futures tumbled 6.55%, the worst weekly loss since the week ended June 1.

Oil futures plunged 3.65% on Thursday, the largest one-day decline since mid-December, after the Fed announced that it was extending its current bond buying program, known as "Operation Twist", until the end of this year following its policy meeting on Wednesday.

The U.S. central bank also revised down its forecast for growth for 2012 and reiterated plans to keep short-term rates at record lows until at least late 2014.

The announcement disappointed market expectations for more aggressive measures to shore up growth in the world’s largest economy, following a recent string of weak U.S. data.

Data released Thursday showing weak U.S. manufacturing activity, a shrinking Chinese manufacturing sector and slowing business activity across the euro zone further added to the gloomy trade environment.

Oil traders often use manufacturing numbers as indicators for future fuel demand growth. A deeper slowdown in China and the U.S. would impair a global expansion that is already faltering because of the euro zone’s ongoing sovereign debt crisis.

A Moody's downgrade of the world's major banks after markets closed Thursday further weighed on risk-sensitive assets.

Meanwhile, a larger-than-expected build in U.S. oil supplies last week is forcing traders to refocus on the supply and demand picture.

The U.S. Energy Department said in its weekly report that crude oil inventories rose by 2.9 million barrels last week to a total of 387.3 million barrels, the highest level since July 1990, underscoring fears over a slowdown in oil demand from the U.S.

But prices recouped some losses on Friday, amid worries over a potential storm in the Gulf of Mexico that could disrupt production. The U.S. National Hurricane Center said Friday that a low pressure system in the Gulf had a 70% chance of developing into a tropical cyclone over the next two days.

Energy traders track tropical storm activity in the event it disrupts production in the Gulf of Mexico, which is home to 20% of U.S. oil production.

Market sentiment found mild support after the European Central Bank relaxed rules on collateral for central-bank loans.

Meanwhile, German Chancellor Angela Merkel and the leaders of France, Italy and Spain agreed to push for a EUR130 billion growth package for struggling euro zone economies at a European Union summit beginning next week.

Spain was expected to make a formal a bailout request for its banks over the weekend after reports on Thursday indicated that Madrid would need EUR62 billion to secure its banking sector.

The yield on Spanish 10-year bonds settled at 6.38% by close of trade on Friday, after surging to a euro-era high of 7.28% on Monday.

There are worries that the region’s worsening sovereign debt crisis could trigger a broader economic slowdown that would curb demand for oil.

Some technical buying also contributed to gains, after prices bounced off a key support level close to USD77.37 a barrel.

A potential loss of Iranian oil supplies helped underpin strong gains in oil prices during late last year and the first quarter of this year.

European Union sanctions on oil imports from Iran will start on July 1 as agreed by the bloc’s governments and will be implemented without any delay, an EU official said Friday.

But prices are down nearly 28% from this year’s high in March, as the market took into account assurances from Saudi Arabia that it would make up for any supply shortfalls against the potential risk for the loss of oil from Iran.

An escalating debt crisis in the euro zone and worries over a deeper-than-expected slowdown in Chinese economic activity also contributed to losses.

Elsewhere, on the ICE Futures Exchange, Brent oil futures for August delivery settled at USD91.39 a barrel by close of trade on Friday.

Prices fell to as low as USD88.49 a barrel earlier in the day, the lowest since December 20, 2010.

The Brent contract retreated 6.8% over the week, while the spread between the Brent and the crude contracts stood at USD11.28 a barrel by close of trade Friday.

London-traded Brent prices are down nearly 29% since hitting an intraday high of USD128.38 on March 1.

In the week ahead, investors will be focusing on the upcoming EU summit amid growing expectations for progress on greater fiscal integration and allowing the bloc's rescue funds to buy government debt.

Elsewhere, the U.S. is to release official data on inflation, manufacturing output and new home sales.

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