Market watch: Energy futures plunge as speculators challenge OPEC

Sept. 25, 2001
International energy futures plummeted Monday, breaking through the floor of the price range targeted by the Organization of Petroleum Exporting Countries. Some observers said speculators were challenging the cartel's energy ministers, who are meeting in Vienna Wednesday.


Sam Fletcher
OGJ Online


HOUSTON, Sept. 25 -- International energy futures plummeted Monday, breaking through the floor of the price range targeted by the Organization of Petroleum Exporting Countries.

Some observers said speculators were challenging the cartel's energy ministers, who are meeting in Vienna Wednesday.

It marked the biggest 1-day fall in energy prices since the start of the Desert Storm on Iraq in 1991. The average price for OPEC's basket of seven crudes dropped $3.47 to $20.51/bbl, falling below the cartel's $22/bbl floor for the first time this year.

Traders blamed fears of an unavoidable, deep economic recession that threatens an imminent decline in world demand for petroleum. But several surprised analysts said the market overreacted, based on current fundamentals.

"Yesterday's fall was not about fundamentals, it was a direct challenge to the (OPEC) price band. Hedge funds were effectively knocking on the door to see whether OPEC is still at home," said Paul Horsnell with JP Morgan Securities Inc., London.

In a report issued Tuesday, Horsnell claimed the drop in energy futures prices was triggered by speculators who assume key OPEC members such as Saudi Arabia and Kuwait are under pressure from US officials not to reduce oil production as the US gears up efforts to strike back at Osama bin Laden and his terrorists.

OPEC members previously agreed to consider adjusting their production if their average basket price remained outside their targeted $22-$28/bbl range for 10 trading days. Officially starting that count-down may be all that OPEC needs to do to push prices back in line, said Horsnell.

"What OPEC says and does over the next few days will determine whether this is the end of OPEC control (of energy prices) for the moment and whether this could also be the start of the slide back into the political and economic abyss of early 1999," he said. "It will determine whether the market can be kept stable, or whether oil producers will now have to worry about their economic stability in addition to the political concerns raised by the military build-up in the Middle East and Central Asia."

Ali al-Naimi, Saudi Arabia's oil minister had no comment on the price fall as he arrived in Vienna for the OPEC meeting. However, Obaid bin Saif al-Nasseri, energy minister for the United Arab Emirates, said, "We shall study the present situation and developments in the market. We shall try to defend the $25 target. This is very, very important for the market".

OPEC President and Algerian oil minister Chakib Khelil said he expects oil prices to pop back within the band of their own accord before the 10-day time limit.

Futures prices for benchmark US light, sweet crudes on the New York Mercantile Exchange fell Monday to levels last witnessed in November 1999. The November oil contract plunged $3.96 to $22.01/bbl, while the December contract dropped $3.82 to $22.44/bbl. However, that benchmark crude regained $1/bbl in early trading Tuesday on the NYMEX.

Home heating oil for October delivery also fell 9.81¢ to 61.06¢/gal Monday, and unleaded gasoline for the same month lost 8.55¢ to 63.6¢/gal. The October natural gas contract slipped by 19.3¢ to $1.91/Mcf.

In London, North Sea Brent crude futures posted losses for the sixth consecutive trading period on the International Petroleum Exchange. The November Brent contract lost $3.42 to $22.02/bbl, and the December contract was down $3.32 to $22.26/bbl. However, the October natural gas contract dipped by 0.3¢ to the equivalent of $3.12/Mcf on the IPE.

Contact Sam Fletcher at [email protected]