London, 12 June 2010

After clawing its way back above $75 a barrel on Thursday for the first time in four weeks, the benchmark oil futures contract fell back again on Friday on news of an unexpected decline in retail sales in the US. The end-of-week decline showed how feeble the rally was and how sensitive oil prices remain to economic news. Oil prices were still ahead for the week, with the benchmark West Texas Intermediate settling Friday at $73.78 a barrel, after dropping 4.1% last Friday, the biggest single-day drop since February, to settle at $71.51.

A disappointing U.S. jobs report hit oil prices last Friday, but better economic news in the U.S. and some calming of economic tension in Europe allowed oil prices to gain three days in a row this week, peaking with Thursday’s close of $75.48 a barrel.

Friday’s report that U.S. retail sales declined 1.2% in May, against a consensus forecast for a small gain, started the downward spiral. Ironically, the Reuters/University of Michigan index rose to a higher-than-expected 75.5 in June – its highest level in two and a half years – from 73.6 in May. Economists were looking for the index to hit just 74 in June.

But concerns about inflation in China and possible measures to curb that rise in prices kept downward pressure on oil. Chinese inflation in May rose to a 3.1% annual rate, a 19-month high and just over Beijing’s 3% maximum for inflation. At the same time, growth in China’s industrial production slowed to 16.5% in the month from 17.8% in the previous month.

China has the second-largest oil consumption globally after the U.S., so signs of slower economic growth in both big consumer nations turned oil investors bearish on Friday.

Earlier in the week, news that Chinese exports rose nearly 50% in May helped boost crude oil prices Also during the week, Federal Reserve Chairman Ben Bernanke told Congress that U.S. economic recovery is on track and a double-dip recession is unlikely.

Those positive economic signs, combined with the second successive weekly decline in U.S. oil inventories, spurred the gains through Thursday.

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By Darrell Delamaide for Oilprice.com who offer detailed analysis on Oil, alternative Energy, Commodities and Geopolitics. They also provide free Geopolitical intelligence to help investors gain a greater understanding of world events and the impact they have on certain regions and sectors.

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