Oil Prices Plummet as Economic Worries Flare Up

Reuters

Oil prices fell by more than $5 a barrel on Thursday with U.S futures touching $80.25 a barrel, as a combination of dismal signals heightened worries about global economic growth and a rallying U.S. dollar added to downward momentum.

Investors were rattled by the U.S. Federal Reserve's statement that the world's largest oil consumer faced significant downside risks, and analysts worried measures to kick-start growth would be insufficient.

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Adding to gloom, a slowdown in China and the worst euro zone private sector growth in over two years cast clouds over the outlook for the global economy.

"It's a combination of no QE3, low economic growth, China's PMI falling and European PMI data either slightly or widely below expectations," said Thorbjørn Bak Jensen, an analyst at A/S Global Risk Management Ltd.

U.S. crude futures were down $4.32 at $81.60 a barrel at 1404 GMT, while Brent futures were $3.76 lower at $106.60 a barrel.

Further downward pressure on Thursday was exerted by the U.S. dollar, which rose to the highest since February against a basket of currencies as investors fled from risky assets.

"Treasuries have rocketed up since the U.S. traders have come in and that's taking Bunds with it... this is a serious risk-off trade today, wherever you look," a trader said.

CLOUDS GATHER

The euro zone's private sector contracted this month for the first time in two years, underscored by German business activity figures dropping to a 26-month low.

With signs the crisis in Greece and other Mediterranean countries was spreading to others in Europe, and a far-from-reassuring prognosis issued by the Fed, fears were magnified by Chinese manufacturing sector data.

A survey showed factory activity in the world's number two economy contracted for a third month, indicating China may fail to provide a counterweight to flagging U.S. and European growth.

The disappointing round of economic data helped send world stocks to a fresh one-year low and investors to pour money into safer currencies.

U.S. Treasury Secretary Timothy Geithner said the European debt crisis and political divisions in the U.S. were the biggest threats to the global economy at a meeting of the Group of 20 on Thursday. "The two other clouds still over us are the European crisis and the deep concern that you can see across the world and around the country about whether the political system in the United States is up to the challenges we face," Geither said.

The G20 meeting on Thursday and Friday was expected to focus on Europe's debt crisis as fears about a Greek default and contagion ot larger euro zone economies multiply.

Mounting gloom about Europe combined with pessimism about the success of the Fed's "Operation Twist" wiped out Wednesday's bullish sentiment after weekly U.S. Energy Information Administration data showed crude inventories fell to the lowest level since January.