Brent set for worst week in two months

Brent futures held above $102 a barrel today as a steep fall in the previous session gave investors an opportunity to buy, but a broad market rout triggered by the US Federal Reserve’s plans to wind down stimulus capped gains.

Global equities, bond prices and commodities plunged in a deep sell-off yesterday, and most markets extended their losses in early Asian trade today. For oil, demand growth concerns following weak manufacturing data from the world’s second-biggest consumer China added further pressure.

Brent crude slipped to as low as $101.88 a barrel before recovering to trade up 44 cents at $102.59 by 0512 GMT. US oil was up 23 cents at $95.37. But both benchmarks were headed for their steepest weekly loss in two months.

“Ultimately, the United States being off the intravenous dip will be a good thing as it will give the economy a chance to stand on its feet,” said Ben Le Brun, an analyst at OptionsXpress in Sydney.

“But investors are looking at the near-term impact of a withdrawal in the stimulus. The weak China PMI numbers are also weighing on sentiment in oil.”

China’s factory activity weakened to a nine-month low in June as demand faltered, adding to data pointing to a sluggish economy and raising the chances the country could miss its growth target of 7.5 per cent for this year.

Both Brent and US oil could slip about 4-5 per cent from current levels, Mr Le Brun said. Any upside will be capped at gains of about 2-3 per cent, he added.

Assets priced in the dollar, like oil, have been pressured by the greenback which has firmed following Fed chairman Ben Bernanke’s comments that the central bank may reduce its bond-buying program with the goal of ending it in mid-2014.

“Oil traded heavy all through the Asia session yesterday, with rallies quickly sold into. As US equities fell and the dollar rallied, this provided a triple headwind for oil,” ANZ analysts saidin a note today.

Yesterday, crude prices posted their biggest daily loss since November with Brent ending down $3.97 and US oil finishing $2.84 lower.

But prices may be supported by concerns about a disruption in supply from the Middle East, with the violence in Syria threatening to engulf neighbouring countries.

Iraq warned that Syria’s civil war is tearing the Middle East apart and Lebanon’s president urged his country’s Hezbollah movement yesterday to pull its fighters out of the conflict.

Syria’s turmoil is dragging its neighbours into a deadly confrontation between Shi’ite Iran supporting president Bashar al-Assad and Sunni Arab Gulf nations backing the Syrian rebels.

“The Middle East is still a clear and present danger to oil markets and prices,” Mr Le Brun said. “Tensions in the Middle East will continue to put a floor on prices.”

Reuters