The November contract for benchmark US light, sweet crudes hit new lows for the year, trading as low as $77.09/bbl Oct. 10 before closing at $77.70/bbl, down $8.89 for the day on the New York Mercantile Exchange.
That market finished its first full October week with a 17% loss as international equity markets reeled in the current financial crisis and energy prices were undercut by indications of flagging demand.
Olivier Jakob at Petromatrix, Zug, Switzerland, said Oct. 10: "The volatility on equities is currently higher than on crude oil, and the stock markets remain the greater input into the current flat price fluctuations on West Texas Intermediate. There is blood on the street, and the stampede continues with equities currently in a self-perpetuating corrective cycle linked to the higher volatility. The sentiment is driven by the main equity indices, but most of them (such as the Dow Jones Industrial Average) have too few companies making the Index. As the result of the historically high volatility, the attack on just one company will bring the whole index sharply lower and then panic selling comes in."
At Barclays Capital Inc. in London, analyst Paul Horsnell said, "The worsening in conditions over the past few weeks has been so acute and so dramatic that the situation has now led to a widespread, sudden, and severe downwards lurch in growth expectations. The corporate bond market is not functioning in anything like a normal way, and credit in all forms has become much more expensive. We have begun to see the impact of these financing constraints in the flow of [energy] data. Given these developments, we think the corporate sector is set to pull back on investment spending and hiring more significantly than has occurred so far in this cycle."
Economic growth reduced
As a result, Barclays Capital reduced its economic growth projection for the US to 1.6% for 2008, down from 2.1% previously, and to 0.8% for 2009, down from 2.5%. Growth forecasts for other key regions also are being cut; Barclays Capital reduced its 2009 growth forecast for China's gross domestic product to 9% from 9.5% previously.
The company's projection for global demand growth in 2008 is just barely positive at 150,000 b/dthe weakest annual growth rate since 1993 when energy demand collapsed in the former Soviet Union.
Horsnell said, "There are many different ways of putting this, but one way to think of it is that outside the Middle East, oil demand is set to fall this year. Our oil market balances now show year-over-year declines in global demand in both the third quarter and the current quarter, the first consecutive quarters of global demand decline since the fourth quarter of 2001 and the first quarter of 2002."
He said, "In terms of 2009 oil demand, following the GDP forecast downgrades, our projection is now for growth of just 330,000 b/d." Demand is expected to be down only slightly from year-ago levels in the first quarter of 2009, with weather likely determining whether quarterly declines in oil demand continue.
There have been sharp reductions in other consensus views of a possibly more severe economic slowdown, with the US Energy Information Administration making large downward revisions to both 2009 demand and non-OPEC supply.
Meanwhile, US crude inventories have continued rising and were close to their 5-year average in early October, while oil product inventories remained extremely stretched. "The US system has started to show some more meaningful hurricane recovery, with runs starting to pick up and with delayed imports starting to arrive," Horsnell said.
He reported Oct. 10: "Crude imports into the Gulf Coast have rebounded back to a more normal 6.2 million b/d from the extreme low of 2.7 million b/d hit 2 weeks ago, as the delayed cargoes continue to work their way back into the data. Further up the pipelines, crude inventories at Cushing, Okla., remain low, reaching a new low for the year in the latest data [through Oct. 3]. The gasoline supply system is returning to normal, with pipelines being refilled . Gasoline imports reached 1.4 million b/d in the [Oct. 3] data, as a small armada arrived in the south to bring the system back to a more even keel. All we need to know about demand is that it is very weak." September may have been the month of weakest US demand for oil so far this year, providing "the first very tentative measure" of "a severe 5.9%" decline in US oil demand across the third quarter.
(Online Oct. 13, 2008; author's e-mail: email@example.com)