MARKET WATCH: Oil prices plunge with rejection of economic rescue plan

Energy prices fell, with crude plunging more than $10/bbl in panicked trading that accelerated after the House of Representatives rejected 228-to-205 a $700 billion plan to resolve the most severe threat to the US economy since the Great Depression.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 30 -- Energy prices fell, with crude plunging more than $10/bbl in panicked trading that accelerated after the House of Representatives rejected 228-to-205 a $700 billion plan to resolve the most severe threat to the US economy since the Great Depression.

It marked the second-largest 1-day price drop ever in the New York oil futures market, surpassed only by a $10.56/bbl loss in January 1991. The equity market was hit even harder than the commodities market, with the S&P 500 Index registering its biggest drop since the 1987 stock market crash. Stock losses on the Dow Jones Wilshire 5000 index totaled $1.2 trillion.

The House's failure to pass the proposed plan after 11 days of debate among government officials is "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.

He said, "In this environment of investment value destruction and reluctance to open credit lines, margin calls on trading positions are increasing and are adding to the selling pressure on commodities. With the increased volatility, one should expect as well the exchanges to soon increase the margin requirements. More investors are also starting to realize that holding an investment in a commodity index is not an investment in 'hard assets' but a credit exposure on an investment bank, the sector currently the most at risk of defaulting."

The economy rescue plan likely will be presented again, perhaps in altered form. However, Jakob said, "That will not necessarily do anything to commodities since the theme of economic growth has been put aside and there is not sufficient liquidity in certain commodities to orderly accommodate the investment outflows."

Having previously traded primarily on fears of supply disruptions, crude now is trading on fear of an economic collapse. In Arlington, Va., analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) said the Sept. 29 drop in oil prices "reflected widespread fears that a bungled bailout bill could presage financial catastrophe." However, they noted, "resurgent optimism" that Congress eventually will take some action pushed oil prices toward $100/bbl in early trading Sept. 30.

Nevertheless, FBR analysts reiterated their average price forecasts of $115/bbl for 2008, $110/bbl for 2009; and $85/bbl for 2010 and beyond. "Not only do we cling to macroeconomic truisms such as the tendency of falling prices to ignite demand, but there are short-lived circumstances we cannot overlook, including the weeklong Asian industrial demand slowdown for China's National Day and the impact of diminished Gulf of Mexico refinery demand resulting from hurricane-related shutdowns," they said.

Meanwhile, the credit crunch should provide opportunities for "cash rich" offshore drillers, said Brian Uhlmer, research analyst with Pritchard Capital Partners LLC, New Orleans. "Strong balance sheets with free cash flow are poised to take advantage of the market. We believe that the lack of available financing will lead to the cancellation of shipyard orders for numerous planned [deepwater drilling] vessels and, possibly, the sale at a discount of vessels that have started construction. This will tighten up the market supply and allow rates to continue to move upward," he said.

In other news, the US Minerals Management Service reported 111 of the 694 manned production platforms and 1 of the 116 mobile rigs operating in the US sector of the Gulf of Mexico were still without crews as of midday Sept. 29. Officials said 48% of the oil and 47.4% of the gas usually produced from offshore federal leases are still shut in. The Department of Energy reported 2 refineries totaling 424,500 b/d of distillation capacity are off line and another 4 refineries totaling nearly 1.3 million b/d of capacity are operating at reduced runs. It said 150,000 customers remained without electrical power in Texas.

Energy prices
The November contract for benchmark US sweet, light crudes dropped as low as $95.04/bbl in intraday trading Sept. 29 before closing at $96.37/bbl, down $10.52 for the day on the New York Mercantile Exchange. The December contract fell $10.09 to $96.09/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $10.52 to $96.38/bbl. Heating oil for October declined 23.45¢ to $2.76/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) lost 26.81¢ to $2.40/gal.

The November natural gas contract tumbled by 40.7¢ to $7.22/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 31¢ to $7.14/MMbtu.

In London, the November IPE contract for North Sea Brent crude fell $9.56 to $93.98/bbl. The October gas oil contract dropped $43 to $919.75/bbl.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost $3.81 to $94.09/bbl Sept. 29. The OPEC Secretariat in Vienna will be closed Oct. 1 for Eid al-Fitr, a major Islamic holiday at the end of the month-long fast of Ramadan.

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