Crude Oil Prices Decline on Concern over Default

Joel Anderson |

The price of crude dropped Tuesday, with futures contracts for November 13th delivery trading down almost 1.3 percent for West Texas Intermediate and over 1 percent for Brent. The primary culprit appears to be persistent concern over the government shutdown and the possibility of a default on American debt.

Potential Debt Default Drives Down Prices

At the heart of falling crude prices was continued concern over the potential for a government debt default. The potential economic collapse that would follow a debt default would most likely result in decreased demand for crude at home and abroad, making oil a much less attractive investment for some.

"Crude oil prices retreated ... as the US budget issues in Washington weighed on market sentiment and raised persistent concerns about a slowdown in the US oil demand," said Sucden brokers analyst Myrto Sokou on Monday. "The main focus remains on the US debt ceiling and government shutdown as the markets are hoping for a resolution to the issue before Thursday's deadline."

Oil markets kept a close eye on news out of Washington, but Tuesday seemed to indicate that the stalemate wasn’t coming to an end.

Supply Up As Well

The continued drop in prices comes after prices reached a 14-week low last Wednesday when the government reported higher-than-expected inventories of crude, adding the price-pressure of increased supply to the already present potential for decreased demand.

"We seem to be tipping the scales back toward another test of $100 a barrel," said Tradition Energy broker and analyst Gene McGillian on Wednesday.

ETFs Hit as Well

Plunging crude prices hit ETFs hard as well, with the United States Oil Fund ($USO) dropping over 1 percent and the PowerShares DB Oil Fund ($DBO) declining over 0.5 percent. Joining them were several equities ETFs tracking oil producers, with the Market Vectors Oil Services ETF ($OIH) off over 0.5 percent, the iShares Dow Jones US Oil Equipment ETF ($IEZ) dropping almost 0.65 percent, and the SPDR S&P Oil & Gas Equipment & Services ETF ($XES) plunging over 1 percent.

 

[Image Courtesy of Wikimedia Commons]

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