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The oil market has been turned upside down since the US House of Representatives shocked global markets last Monday by rejecting a $700-billion package to rescue the troubled financial sector. The fallout sent West Texas Intermediate prices down by $10.52 a barrel while the Dow Jones lost 778 points in its biggest one-day drop ever, wiping out $1.3 trillion of wealth in the stock market.
Though a revised bailout bill was finally passed by the Senate on Wednesday and later by the House on Friday, it was unlikely to restore investor confidence and provide the much-needed support to crude prices.
West Texas Intermediate prices settled at $93.88 a barrel on Friday, weighed down by concerns about slumping oil demand in the US where employers cut payrolls in September by 159,000 jobs, the steepest monthly drop in nearly six years.
The US crisis has spread to Europe where governments bailed out the struggling banks Fortis, Bradford & Bingley, Dexia, and Glitnir. The widening financial turmoil has raised grave concerns for the global economy as well as deteriorating oil demand.
The US dollar rallied against the euro, breaking the $1.40 mark as alarm grew over the worsening EU economy and expectations of ECB rate cuts by November. Dollar gains pressured oil prices down even further. Another bearish factor was a larger-than-expected buildup of US crude stock and the surprise increase in US gasoline stocks.
Crude prices this week are likely to maintain their downward trend as fears about energy demand destruction ripple worldwide. A slowdown in the global economy will cause extensive job cuts and further slash fuel consumption. The gloom overshadowing the US and European economies will erode investor confidence in commodity markets and place negative pressure on oil prices.
Gasoline prices dropped almost $11 a barrel last week to close in Singapore at around $98 a barrel on Friday, driven by sharp declines in global crude prices. Thin trading also squeezed prices as several Asian markets were closed for public holidays last week. In Vietnam, weak domestic demand and high stocks have forced the county to keep imports at the minimum level for nearly two months. Meanwhile, China has skipped its imports and maintained gasoline exports.
Amid tightened supplies in the region, there was some improvement as gasoline stocks in Singapore climbed up from a seven-month low. Gasoline prices in the upcoming week will be strained by weak US demand. The increase in US gasoline stocks will also make arbitrage opportunities to move gasoline out of the region more difficult.
Singapore diesel prices dropped sharply by more than $16 to close the week at around $104 a barrel on lower global crude values and surplus supplies in the region.
Singapore stocks for the week ending Oct 1 jumped to a record high of 12.4 million barrels. This came after refineries in Asia maintained high intakes to take advantage of good margins. Regional demand was too low to absorb diesel barrels as high domestic stocks have kept Chinese and Vietnamese importers out of the market during the past few months.
Arbitrage opportunities from Asia into Europe were also limited by higher freight costs.
Looking forward, a slowdown in the world economy will dampen demand for diesel in the industrial and transport sectors. China's GDP, in particular, is expected to expand by just 9.9% this year, the first single-digit growth in almost six years.
Prepared by Thai Oil Plc
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