HOUSTON, Oct. 10 -- Oil prices continued to tumble Oct. 9, pulled down by a loss of more than 20% in equity markets over the last seven trading sessions, as the Organization of Petroleum Exporting Countries called an emergency meeting Nov. 18 in Vienna to discuss a possible reduction in crude output to shore up prices.
Olivier Jakob at Petromatrix, Zug, Switzerland, noted, "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."
As a result, Jakob said, "The commodity indices should be under liquidation pressure today and will bring their year-to-date returns under further pressure. As cash repatriation continues, the dollar index is well supported, which in turn is also playing against commodities."
In the Houston office of Raymond James & Associates Inc., analysts said, "The Dow has already fallen 1,376 points this week, reaching 5-year lows, and oil is trading below its 12-month low of $85/bbl." Despite OPEC's pending meeting, they said, "Many analysts worry that the demand destruction of a global recession, or even depression, will outweigh any efforts to prop up prices."
Jakob said, "The question is not really as to whether there will be OPEC cuts but really about the size of the cuts; and lower prices will be required for the market to give credibility to them. The market might want to push OPEC into meaningful cuts, through lower prices, rather than having OPEC doing a Trichet trick." In June, Jean-Claude Trichet, president of the European Central Bank, announced his bank might raise interest rates and triggered what was at that time the biggest 2-day gain ever on the New York futures market. It was a feat—Jakob said then—that no war, no hurricanes, no OPEC member had ever previously managed.
The OPEC meeting is "prudently timed to occur after the US presidential election," noted analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va. They speculated that "almost-certain cuts" could "go as deep as 1 million b/d given OPEC producers' average take this year that exceeds $100/bbl." However, they observed, "In practice, the pivot will always be Saudi Arabia's willingness to dip into financial reserves, if necessary, to defend against weaker future prices—a real possibility for a little while, but an ever-harder decision amid global deleveraging and burgeoning domestic spending."
FBR analysts said, "A bigger factor may well be delays in high-marginal-cost ultradeepwater and unconventional projects, both for practical (financing-related) and strategic (price-related) reasons. Likewise, similar delays to the build out of a high-complexity refinery base overseas could preserve the light-heavy premium driven by light products demand. Last, though it may be difficult to stay focused on fundamentals in a world where panicked selling could still move major indices."
Meanwhile, FBR analysts warned, "The price of oil has no natural floor in the short term if refiners are not buying it."
In other news, the US Minerals Management Service reported 85 of the 694 manned production platforms in the Gulf of Mexico are still without crews as of midday Oct. 9. MMS said 43.4% of the normal oil production and 38.6% of the usual gas production from federal leases in the gulf remain shut in. The Department of Energy said only ExxonMobil Corp.'s 348,500 b/d refinery in Beaumont is still offline since Hurricane Ike, and another 7 refineries with a combined capacity of 1.6 million b/d are at reduced runs. Officials said 3.2 bcfd of gas processing capacity is shut down, while another 6.5 bcfd is restarting or operating at reduced runs. DOE so far has drawn 5.2 million bbl of crude from the Strategic Petroleum Reserve since Sept. 1.
The November contract for benchmark US light, sweet crudes dropped $2.36 to close at $86.59/bbl Oct. 9 after first trading at $84.19/bbl, a new intraday low for this year, on the New York Mercantile Exchange. The December contract fell $1.81 to $86.62/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.35 to $86.60/bbl. Heating oil for November dropped 7.59¢ to $2.42/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) dipped by 0.25¢ to remain virtually unchanged at $2.03/gal.
The November natural gas contract gained 8.3¢ to $6.83/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 8.5¢ to $6.69/MMbtu. The Energy Information Administration earlier reported the injection of 88 bcf of natural gas into US underground storage during the week ended Oct. 3. That increased the amount of working gas in storage to 3.2 bcf; that's 117 bcf less than at the same period a year ago but 69 bcf above the 5-year average.
In London, the November IPE contract for North Sea Brent crude dropped $1.70 to $82.66/bbl. Gas oil for October lost $3 to $788.50/tonne.
The average price for OPEC's basket of 13 reference crudes increased 87¢ to $78.25/bbl on Oct. 9.
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