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Oil prices decline as equities slide on Europe debt worries

7th Sep 2010, 12:56 pm Oil prices decline as equities slide on Europe debt worries

Oil prices continued sliding today as a selloff in stock markets added to a couple of other bearish factors that have been impacting crude oil futures so far this week.

An article in the Wall Street Journal suggested that the recent stress test of European banks understated some banks’ holdings of government debt, which it said was potentially risky.

The health of the European banking system has been a major concern that has kept equity markets under pressure for months in the wake of the debt crisis that struck the euro zone and nearly forced Greece to declare bankruptcy, while it was becoming increasingly hard for banks to borrow.

The stress test of 91 banks resulted in just 7 failures, providing immediate relief to the markets, though the strictness of the test was immediately brought into question.

Now the strength of the banks and their ability to survive further economic turbulences is again emerging among the main factors behind share price movements. In additional to that, banking group Barclays (LON:BARC) slipped 3.5% today after announcing a change at the helm. John Varley, who has been CEO since 2004, will step down in March 2011 to be replaced by Bob Diamond.

The FTSE 100 slipped 1%, while the Dow Jones Industrial Average is currently projected to open 0.7% lower.

Oil prices usually track movements in share prices, which serve as an indicator of the strength of the economy and the outlook for energy demand.

Yesterday’s Labor Day holiday in the US marked the conclusion of the summer driving season, which usually leads to a decline in gasoline demand.

Oil demand in the US has been in decline, which was reflected by substantial gains in crude inventories reported by the Energy Department. Last week, the US government revealed a massive increase of 3.4 million barrels, while the American Petroleum Institute (API) reported a gain of 4.8 million barrels.

October Brent Crude slid to US$76.04/barrel, while US light, sweet crude for October delivery declined to US$73.33/barrel.

Most blue chip oil and gas producers were in decline today. BP (LON:BP) posted a small loss, while fellow supermajor Shell (LON:RDSB) slid 1.6%, as did BG Group (LON:BG). Cairn Energy (LON:CNE) declined 1%.

Tullow Oil (LON:TLW) bucked the trend, rising 2.5%.

Oil and gas engineering firms Amec (LON:AMEC) and Petrofac (LON:PFC) lost nearly 2%.

Midcaps followed the trend with the sole exception of Soco International (LON:SIA) which stood just above the opening level.

Dana Petroleum (LON:DNX), JKX Oil & Gas (LON:JKX), Dragon Oil (LON:DGO) and Melrose Resources (LON:MRS) posted small losses. Premier Oil (LON:PMO) and Heritage Oil (LON:HOIL) retreated 1% and Salamander Energy (LON:SMDR) moved down 1.7%.

Services company Wood Group (LON:WG) dropped 2.2%.

The leading performers among the small caps included Victoria Oil & Gas (LON:VOG) and Petro Matad (LON:MATD), which advanced 8.5% and 5% respectively.

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