Oil prices dropped more than $1 on Monday after rocketing to record heights near $140 per barrel late last week, but some analysts warned of a bubble that could burst soon.
Crude soared beyond $139 on Friday after a shock jump in United States unemployment sent the dollar reeling and Wall Street plunging by more than 3% amid fears of sharply slower economic growth.
New York’s main oil futures contract, light sweet crude for July delivery, gave back $1,27 to $137,27 a barrel on Monday.
The contract had spiked on Friday by $10,75 a barrel — the biggest-ever one-day jump — after soaring to an all-time high of $139,12.
On Monday, Brent North Sea crude for July delivery slid $1,73 to $135,96. Brent had hit a lifetime pinnacle of $138,12 and gained $10,15 in value on Friday.
“The extreme price volatility that we are now seeing is characteristic of bubbles that are about to burst,” said Capital Economics analyst Julian Jessop.
“The next big move is therefore likely to be down.”
He also argued that the recent jump in oil prices was not related to the fundamentals of supply and demand, but to ongoing weakness in the US currency.
“Friday’s jump … provides the clearest evidence yet that the oil market is increasingly detached from fundamentals.”
“A relatively minor reversal in sentiment towards the dollar was magnified into a much larger move in oil prices,” added Jessop, who also said that further highs could not be ruled out.
In contrast, analysts at US investment bank Goldman Sachs warned that prices could reach $149 this summer because of “tight underlying fundamentals of the oil market”.
Crude oil began surging higher last Thursday after European Central Bank chief Jean-Claude Trichet signalled that eurozone interest rates would head higher in July.
That sent the dollar tumbling against the euro because of the prospect of widening interest-rate differentials, dealers said. The weakening US currency stimulates demand for oil because dollar-priced goods become cheaper for foreign buyers.
Petromatrix analyst Olivier Jakob said that prices “reversed course violently when Trichet shocked the financial system by pointing to an interest rate hike in July”.
“This lead to a $16-per-barrel rally in slightly more than 24 hours.
“Trichet has managed what no war, no hurricanes, no Opec [news] has ever managed to do,” he added in reference to factors that have caused prices to spike higher in the past.
The market was also driven higher by simmering geopolitical tensions after reported remarks about Iran’s nuclear programme by Israeli Deputy Prime Minister Shaul Mofaz.
Analysts said the comments fanned fears of a possible conflict in the oil-rich Middle East. — AFP