Oil prices down on reduced global economic growth outlook

Oil prices plunged on Thursday amid concern of reduced global demand as the World Bank reduced its forecast for global economic growth. According to its report, the global economy will expand 2.2% this year, less than its previous projections of 2.4% in January. Gross Domestic Product in the European Union will contract by 0.6%, while the U.S. and Japan will show improvement, the World Bank said.

On the New York Mercantile Exchange, WTI crude for July delivery traded at $95.17 a barrel at 8:32 GMT, down 0.74% on the day. Prices varied between days high at $95.87 and day low of $95.05 per barrel.

Brent oil for August delivery also slipped and stood at $103.00 a barrel at 8:32 GMT. The European benchmark was 0.55% lower on the day and ranged between days low of $102.80 and high at $103.58 a barrel.

Conflicts in the Middle East that could threaten oil supplies were outweighed by the news for global economic slowdown. World Banks estimate follows yesterdays EIA report, which showed Crude Oil Reserves in the U.S. gained 2.5 million barrels to 393.8 million, which is above the average range for this time of the year. Gasoline stockpiles rose by 2.7 million barrels last week and were also above the average range. According to a Bloomberg News survey, gasoline reserves were forecast to drop by 500 000 barrels, after they fell by 366 000 in the preceding week. Distillate fuel inventories marked a decrease of 1.2 million barrels during the week ending June 7 and remained lower than the average range.

Negative news came out during the weekend from China as well, the worlds second biggest oil consumer. Consumer inflation shrank to 2.1%, mismatching a 2.9% forecast and Producer Price Index (PPI) tumbled 2.9%, above expectations of a 2.5% decrease. China’s industrial output mismatched expectations and rose 9.2% in May, below forecasts. Factory-gate prices dropped for a fifteenth straight month. Chinese exports jumped by only 1% in May and shipments to the U.S. and European Union, the Asian nation’s two biggest export targets, declined for a third straight month. China’s imports were projected to gain 6% but official figures strayed well below and showed a 0.3% decrease, marking a ten-month low.

The World Bank reduced its forecast for Chinas economic growth to 7.7%, down from 8.4%. This comes after during the last week of May the IMF cut its economy growth forecast for China to 7.75%, down from 8%. The Organisation for Economic Co-operation and Development also trimmed its expectations to 7.8% from 8%. Chinese leaders made statements in May they will tolerate a slower, but more ecological friendly expansion, boosting concerns for commodities demand.

The IEA said: “While Europe’s economic woes are taking a toll on demand, there are mounting signs that China’s oil use, like its economy, may have shifted to a lower gear.”

On Tuesday OPEC and the EIA cut their global demands forecasts. The group trimmed its expectations for 2013 world demand growth by 10 000 barrels per day to 780 000. Meanwhile, OPEC pumped out a seven-month high of 30.9 million barrels per day during May, mainly due to increased output from Saudi Arabia. The IEA said in its monthly report yesterday that OPEC will have to pump out 29.8 million barrels per day in order to meet demand in the second half of the year, which is 200 000 barrels lower compared to IEA’s previous projection. This means OPEC will have to cut its output by 1.1 million barrels.

Oil prices have been drawing support from the dollar, which has extended losses during the whole week against its major counterparts. Although oil demand globally is lower and projections are being cut with each report, the weakening greenback has been support oil prices as it makes dollar-priced commodities cheaper for foreign currency holders and also boosts their appeal as alternative investments.

Ken Hasegawa, a commodity sales manager at Newedge Japan said for Reuters: “The dollar is providing support to oil. Fundamentally, prices should go down because demand is weak. China and Europe are not doing good, while oil supplies are ample.”