Front-month crude plunged $10.52/bbl Sept. 29 as the House of Representatives rejected a $700 billion plan to resolve the most severe threat to the US economy since the Great Depression.
It was "a painful reminder that there is one thing more inept and selfish than a banker in New York: a politician in Washington, DC," said Olivier Jakob at Petromatrix, Zug, Switzerland.
Still, the surprise move accomplished one thing politicians had been promising to do all year—it brought down oil prices in the second-largest 1-day drop ever in the New York futures market, surpassed only by a $10.56/bbl loss in January 1991 during the early success of Desert Storm. But the equity market was hammered even harder, with the S&P 500 Index suffering its biggest drop since the 1987 stock market crash. The Dow Jones Industrial Average plummeted a record 777 points. Stock losses on the Dow Jones Wilshire 5000 Index totaled $1.2 trillion.
Crude rebounded above $100/bbl Sept. 30 as the US Senate revived and sweetened the rescue plan. "The dollar index was under an extreme rally, the rest of the commodity complex was under pressure, published demand data points were weaker than expected, but oil against all odds managed to make strong gains," Jakob noted.
September ended with crude prices down almost 13% for the month and 28.1% lower for the expiring third quarter, the biggest decline since the early success of Desert Storm in January 1991 when a US-led coalition repelled Iraq's invasion of Kuwait. Even so, the average crude price was still up 5% for the year.
Crude prices dipped below $100/bbl Oct. 1 as the Energy Information Administration reported US crude inventories gained 4.3 million bbl to 294.5 million bbl in the week ended Sept. 26, surpassing the Wall Street consensus of a 2.4 million bbl build. Gasoline stocks increased by 900,000 bbl to 179.6 million bbl, below average for the time of year. Wall Street was anticipating a drop of 1.7 million bbl. Distillate fuel inventories fell 2.3 million bbl to 123.1 million bbl, surpassing an expected decline of 1.6 million bbl.
Below January prices
Energy prices continued to fall with the front-month crude contract tumbling lower than price levels at the start of the year and world demand at the lowest level in 5 years. The November contract of benchmark US light, sweet crudes dropped to $93.97/bbl Oct. 2 on the New York Mercantile Exchange vs. a closing price of $99.62/bbl for the front-month contract Jan. 2, the first day of regular trading for 2008. Another front-month contract hit an intraday low for the year of $90.51/bbl Sept. 16.
Jakob described the steep sell-off as "the case of the commodity house turning into a slaughter house." He said, "Commodities across the board were under severe pressure. A depressive recession is not the best climate for the commodity theme, but Sept. 30 was also the cut-off date for [yearend] redemptions for many hedge funds."
Energy prices continued to decline Oct. 3 for the third consecutive session of the New York market even as the US House of Representative passed the revised $700 billion economy rescue plan.
The Dow Jones Industrial Average climbed in early trading that day and was up more than 300 points as House members began to vote. But that gain was wiped out among rising fears that the rescue plan won't unfreeze credit markets. US stock indexes fell for a third consecutive day, with the Dow Jones Industrial Average down 7.4% for the week.
That same day Swiss bank UBS AG announced it is reorganizing its investment bank and closing most of its commodities business, with a loss of 2,000 jobs because of the financial crisis. The world's biggest wealth manager, UBS announced a small profit in the third quarter after a year of losses. Its US subprime mortgage exposure in the US earlier forced the firm to write down $42 billion.
The US economic rescue package "might provide some short covering," Jakob said. "But the gasoline crack trading below $1/bbl is an indicator of the poor state of the oil markets. US refining margins remain at risk, and this can only translate into lower crude oil demand and oil being pushed back to the producers. On a dollar adjusted basis, the price of crude oil is however probably not yet low enough for Saudi Arabia to panic."
Meanwhile, the US dollar hit a 13-month peak vs. the euro after the European central bank said it was willing to cut rates for the first time in 5 years.
(Online Oct. 6, 2008; author's e-mail: email@example.com)