8:14 AM
0

With the recent downgrade of US debt issue circling, one of the most affected product is crude oil. Here in the Philippines, crude oil prices also went down.

Here's an interesting article from Seeking Alpha about crude oil price reversal,


Crude futures fell sharply on Monday, (-4%) as S&P’s downgrade of the U.S. credit rating strengthened worries about the economic recovery and demand for oil. This is really a continuation of last week‘s decline. The fundamentals for oil markets have been weakening in most of Q2 2011 with demand softening as result of higher gasoline prices despite supplies being tight on lack of exports from Libya. Front month crude (NMN - CL1U) dropped $3.31, (-3.8%), at $83.57 a barrel on the NYME. The contract earlier hit an intraday low of $82.52 a barrel. Oil lost 9.2% last week — including a pullback of nearly 6% on Thursday that sent prices to their lowest since mid-February. Other energy products tracked oil lower, with heating oil leading the way. Front contract (NMN - HO1U) lost 7 cents, or 2.4%, to stand at $2.86 a gallon. September gasoline (NMN - RB1U) declined 5 cents, or 1.8%, at $2.75 a gallon.

This raises some key questions about the current deflationary spiral. Despite heightened uncertainty around the outlook for commodities, we are still keeping a constructive view for the sector’s prospects. Factors include still-higher than expected world GDP growth/EM world, sufficient to tighten key commodity markets and commodity-supply tightness that have substantially offset if not dominated demand disappointments in key markets. For oil, it’s only a matter of time before inventories and OPEC's spare capacity will become effectively exhausted, requiring higher oil prices to restrain demand. The recent decline in the price of commodities and equities decrease the valuations with a very little effect on forward earnings/demand estimates (which have remained subdued). The spat of negative economic news will set the stage for economic data surprising to the upside. Market participants (especially managed money) will treat it as positive news for crude oil demand and crude oil price. The main factors for this view are:

Continue reading here.