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Oil boils over

Sep 23, 2008

What a day it was for the energy markets yesterday as crude oil spiked nearly US$ 25 per barrel in a single session though finally settling at US$ 16.4 per barrel higher than the previous close. This was the sharpest ever rise recorded by oil and eclipsed the US$ 10.8 a barrel gain seen on 6th June 2008. The price of the commodity now stands at US$ 120.9 a barrel. So what was the reason for this sharp move in crude prices when the entire world is living in fear of a deep economic slowdown (which leads to demand destruction)? One was the covering of short positions by oil traders as yesterday was the last day of trading in the October oil futures contract (trading is usually volatile on the last day of a contract expiry).

The second was the dollar, which crashed against other major currencies on fears that the trillion dollar bailout of financial institutions will exert tremendous pressure on the US government's deficit to rise further.

As a matter of understanding, crude oil is traded in US dollars around the world. As such, oil becomes more expensive when the dollar weakens. We had indeed talked about the impending pressure on the US dollar from the US government's mega rescue plan in yesterday's issue of our daily newsletter - The 5 Min. WrapUp.

  • Also read - Pressure on dollar of the US bailout plan

    As a matter of fact, the combination of spending US$ 700 bn on buying illiquid mortgages and providing another US$ 400 bn to guarantee money-market mutual funds is expected to significantly enhance the US government's deficit.

    Some economic experts have even opinionated that the pressure on the greenback from the deteriorating balance sheet of the US government will 'dwarf the short-term gains from solving the banking crisis'.

    The spike in oil had its impact on the US stock indices yesterday with the same falling by almost 4%. Asian markets are trading weak currently. Major losers include stocks in Hong Kong (3%) and Singapore (2%).

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