BBD:FOREX -Dollar up on Fed tapering view, outperforms yen and franc
LONDON — Brent oil futures eased towards $107 a barrel on Monday as investors dumped risky assets over concern about weaker emerging-market economies, but US crude held up due to a spell of cold weather.
The US Federal Reserve is widely expected to cut its bond-buying by another $10bn at its regular two-day policy meeting starting on Tuesday, with knock-on effects for emerging-market liquidity. Tighter credit conditions in China are also raising fears of a slowdown.
"There is quite a lot of uncertainty creeping in here," said Saxo Bank senior commodity strategist Ole Hansen.
Brent crude was down 32c to $107.56 a barrel by 10.19am GMT. But US oil gained 27c to $96.91.
The weaker Brent price reflected a sell-off in stock markets in Asia and Europe following a hammering for emerging-market currencies and bonds last week.
Emerging markets benefited from investment flows when interest rates in the US and other developed markets were low. But now that the Fed is changing tack, investors are getting out of the emerging markets with large current account deficits, raising fears over their future economic health.
"Investors are withdrawing from risky assets, and that includes cyclical commodities," said Commerzbank energy analyst Carsten Fritsch in Frankfurt.
He was surprised Brent had not moved lower given the sell-off in emerging markets.
"These are the main drivers of commodities demand," he said. "If this turmoil leads to slower economic growth, then commodities demand would cool somewhat."
Analysts also pointed to concern over Chinese growth following weaker than expected data last week.
A Reuters poll showed economists expected Chinese gross domestic product growth to slow to 7.4% in 2014 from 7.7% in 2013.
"Emerging markets have had a turbo boost from loose Federal Reserve monetary policy and Chinese growth with its insatiable commodities demand," said PVM Oil Associates MD David Hufton.
"Remove one prop and it’s a potential problem. Remove both and the potential is realised."
Cold weather
US crude prices remained underpinned by the freezing conditions across Canada and the US, which have boosted demand for natural gas and heating oil.
US natural gas prices are at a four-year high, and Mr Hansen said it looked as if a heating oil shortage was beginning to develop on the US East Coast.
"That has supported the whole energy complex in the US," he said.
US crude was also underpinned by the opening last Wednesday of the southern leg of Transcanada’s Keystone pipeline extension. This will help alleviate the supply bottleneck at Cushing, Oklahoma, a major delivery point for US crude.
The opening triggered some spread compression between Brent and US crude, which is now trading at about $10.63 a barrel, in from about $15 a barrel on January 9.
