Growing fears that a deep European recession may be unavoidable drove oil prices down over 5% Wednesday to their lowest level in more than three months.
Commodities across the board were hit with a broad selloff.
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If European leaders are unable to contain the long-running debt crisis, fragile economies in Spain and Italy could face the same fate as Greece’s, which has been teetering on the brink of default for months.
Austerity measures sought by German Chancellor Angela Merkel, currently Europe’s de facto leader, and the European Central Bank could also push Europe into recession. Cutting government spending across Europe will crimp demand for all manner of commodities, in particular crude oil and other raw materials used in manufacturing.
Oil futures closed down $5.19, or 5.18%, at $94.95 in trading on the New York Mercantile Exchange.
Meanwhile, the price of gold fell $75.60 per troy ounce, or 4.55% to $1,584.30 and Standard and Poor’s GSCI index of raw materials closed down just over 4%. The dollar climbed 0.39% against a basket of six world currencies, while the euro fell 0.4% to $1.2977 against the greenback.
“The fragile state of Europe continues to have a major impact on all markets,” said Tom Bentz, a director at PNB Paribas Prime Brokerage Inc. “They’ve got a ways to go before they get out of that mess.”
Reduced demand for manufactured goods caused by a slowdown of the European economy will “put pressure” on all commodity market, he said, first and foremost oil and petroleum products.
Add to that continued “lackluster demand” for gasoline in the U.S. due to domestic economic woes stemming from a high unemployment rate and a weak housing market, and commodities investors appear to have “come back to their senses,” according to Ben following a rally on Tuesday.
Also Wednesday, an agreement by oil producing group OPEC on a high output target raised fears that inventories could climb above their already high levels.
Rumors that Iran intended to shut down the Straight of Hormuz, a main artery for shipping oil around the world, briefly pushed oil higher. But the rally was short-lived.
Stocks surged higher late last week on an announcement that European leaders had agreed to a treaty that would allow for a more centralized approach to budgetary discipline.
But that announcement has since been clouded by considerable doubts related to, for instance, the ability of specific countries to ratify such a pact and agree to further austerity measures that would cut already-meager budgets. Also uncertain is what measures could be taken against countries that fail to live within the new restrictions – economic sanctions seen an unlikely option.
Conversely, imposing additional austerity on countries already hard hit by an earlier global recession will undoubtedly cut into growth and GDP. None of this bodes well for the commodities markets.