Oil Prices Kick Off Quarter With a Whimper

NEW YORK ( TheStreet) -- Oil prices woke up to the new quarter with a whimper as panicked traders digested news about a possible Greek default.

Brent crude oil for December delivery was tumbling $1.54 to $99.34 a barrel, while West Texas Intermediate (WTI) light sweet crude oil for November delivery was losing $1.67 to $77.53, after Greece's finance ministry said Sunday that the deficit will likely be 8.5% of its gross domestic product in 2011, which was higher than the 7.8% level it had been targeting.

The admission sparked fears among global investors that the country won't be approved for its next tranche of loans, which are necessary for Greece to avoid a default.

Over the weekend, China and Europe's readings on manufacturing activity were in line with expectations.

"Nonetheless, the Eurozone is seeing a contracting manufacturing sector, while China is barely showing expansion," noted Matt Smith, an analyst at Summit Energy, a subsidiary of Schneider Electric.

The Institute for Supply Management said Monday that economic activity in the manufacturing sector expanded in September for the 26th consecutive month, but noted that new orders remained unchanged from August -- indicating contraction for the third straight month.

"Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products," the ISM said.

On Friday, Baker Hughes ( BHI) said oil rig counts fell eleven to 1,060 -- a clear slowdown in the pace of rig additions that Canaccord Genuity analysts say is "not surprising," given that "enthusiasm surrounding putting new rigs to work would be waning as E&Ps (exploration and production) await clarity on the macro outlook."

In light of the gloomy global economic outlook, speculators continue cut back on New York Mercantile Exchange oil futures and options. Their positions declined by about 7% to 198,000 contracts last week, bringing the total cumulative decline over the past two weeks to roughly 12%.

This, as "non-commercial players nurse their wounds following the latest bout of crude price weakness," Canaccord Genuity analysts remarked. According to these analysts, the last time speculative long positions declined by that much in a two-week period was early August, when prices collapsed by nearly $15.

However, "as is typical, the cleansing of insecure longs set the stage for crude prices to reclaim over half of the decline the following week," they pointed out.

BGC Financial director Roger Volz says the next key support level for WTI crude oil is $76.90 -- this was the upside breakout line from September of last year.

He added that the key support level for Brent crude oil is now at $98.80 for longer-term market participants.

Danske Research analysts predict that commodity prices will suffer further in the near-term amid the downbeat macroeconomic news flow, unwinding of long-speculative positions and dollar strength.

However, they stress that demand for raw materials will most likely see a comeback towards the end of the year as headwinds start to fade and the dollar starts to suffer from "structural factors."

That said, the analysts expect commodity prices to rise some 2.5% year-over-year in 2012 "with copper still set to be the front runner ... whereas limited upside is seen for wheat and zinc."

Danske analyst have kept their Brent crude forecasts unchanged and still see the global oil market tightening next year, as emerging markets demand "looks set to be healthy and to notably outpace production."

The analysts forecast that Brent oil will average at $114 in 2012, but have lowered their base metals projections -- while maintain that copper could still hit $10,000 during the course of next year.

They also see some limited upside for grains prices.

"Consumers should consider hedging 2012 exposure at current price levels," note the analysts.

Oil and gas stocks were trading in the red. Triangle Petroleum ( TPLM) was tumbling 3.9% to $3.45; EOG Resources ( EOG) was losing 3.5% to $68.50; Apache ( APA) was falling 3.3% to $77.56; Anadarko Petroleum ( APC) was surrendering 2.4% to $61.57; Marathon Oil ( MRO) was behind by 3.1% to $20.92; Chevron ( CVX) was falling 1.7% to $90.98; and BP ( BP) was lower by 1.4% to $35.58.

-- Written by Andrea Tse in New York.

>To contact the writer of this article, click here: Andrea Tse.
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