'Doom' fears stampede energy traders

Oct. 3, 2011
A warning by the US Federal Reserve Bank that the global economy likely will remain at risk for years resonated like a voice of doom through world markets Sept. 21, stampeding traders away from high-risk investments such as crude oil.

A warning by the US Federal Reserve Bank that the global economy likely will remain at risk for years resonated like a voice of doom through world markets Sept. 21, stampeding traders away from high-risk investments such as crude oil.

Despite a bullish government report that same day of falling US inventories, the front-month November contract for benchmark US crude dropped an aggregate $7.07 in three trading sessions to below $80/bbl on Sept. 23 on the New York Mercantile Exchange, down 9% for that week. West Texas Intermediate registered a net loss of $8.11/bbl for the week while North Sea Brent was down $8.25/bbl in the same period.

That included an awesome 6.3% drop Sept. 22 in the New York market as weakening Chinese manufacturing data exacerbated worldwide economic concerns, prompting Olivier Jakob at Petromatrix in Zug, Switzerland, to warn, "The battle for survival at $80/bbl for WTI is back." He said, "We are again knocking on the price level where the downside price pressure can accelerate if broken."

Jakob said, "The $80/bbl WTI price level was well defended in August and will need to be again; the problem, however, is that the global picture has deteriorated further over the last 30 days." The market quieted some on Sept. 23, but WTI closed the week at $79.85/bbl.

The Fed announced that same week its third attempt in 3 years to stimulate the economy. It plans to implement its "Operation Twist" by selling $400 billion worth of treasury notes that mature within a few years and using that revenue to buy treasury notes that will mature 6-30 years from now. Its strategy is to reduce long-term interest rates—already at record lows—to make long-term loans cheaper for consumers and corporations (OGJ Online, Sept. 19, 2011).

Politicians under pressure

One positive result of the market plunge is that it "might just add to more urgency for policymakers to take more decisive actions, particularly for the Euro-zone," said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

The Group of 20 (G20)—comprised of finance ministers and central bankers from the 20 largest economies—met over the weekend, with some members promising in advance to "take all necessary actions to preserve the stability of banking systems and financial markets."

But the continued decline in oil and stock prices indicated investors are skeptical elected officials have the political will to take the hard steps necessary to resolve the financial crisis.

Separate meetings of International Monetary Fund-World Bank officials on Sept. 23 and of G20 representatives at the end of the week brought no resolution of the economic crisis. Germany and other affluent Euro-zone members pushed to renegotiate the July agreement to bail out financially crippled Greece. With Greece's economic situation still deteriorating, they said, a bigger reduction of its debt load may be required. But the Institute of International Finance, representing international banks, said forcing private creditors to write down their Greek bond holdings more than the 21% tentatively agreed to in July would quickly spread the crisis to other parts of Europe. Germany's Deutsche Bank, a major lender to Greece, opposes the proposal backed by the German government.

There were "lots of rumors over the weekend about a potential $2 trillion-plus euro rescue package," said analysts in the Houston office of Raymond James & Associates Inc. on Sept. 26. But nothing was finalized at any of the meetings. "Greece has spent roughly half of its independent existence in default. If unable to secure additional loans, the country could go bankrupt [in October]," the analysts noted.

Nevertheless, the G20 meeting "provided moral support" despite its lack of solutions to the Euro-zone sovereign debt crisis, said James Zhang at Standard New York Securities Inc., the Standard Bank Group. "Facing these uncertainties, the US dollar strengthened vs. most other major currencies, except the yen, which has weighed on most dollar-denominated commodities.

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About the Author

Sam Fletcher | Senior Writer

I'm third-generation blue-collar oil field worker, born in the great East Texas Field and completed high school in the Permian Basin of West Texas where I spent a couple of summers hustling jugs and loading shot holes on seismic crews. My family was oil field trash back when it was an insult instead of a brag on a bumper sticker. I enlisted in the US Army in 1961-1964 looking for a way out of a life of stoop-labor in the oil patch. I didn't succeed then, but a few years later when they passed a new GI Bill for Vietnam veterans, they backdated it to cover my period of enlistment and finally gave me the means to attend college. I'd wanted a career in journalism since my junior year in high school when I was editor of the school newspaper. I financed my college education with the GI bill, parttime work, and a few scholarships and earned a bachelor's degree and later a master's degree in mass communication at Texas Tech University. I worked some years on Texas daily newspapers and even taught journalism a couple of semesters at a junior college in San Antonio before joining the metropolitan Houston Post in 1973. In 1977 I became the energy reporter for the paper, primarily because I was the only writer who'd ever broke a sweat in sight of an oil rig. I covered the oil patch through its biggest boom in the 1970s, its worst depression in the 1980s, and its subsequent rise from the ashes as the industry reinvented itself yet again. When the Post folded in 1995, I made the switch to oil industry publications. At the start of the new century, I joined the Oil & Gas Journal, long the "Bible" of the oil industry. I've been writing about the oil and gas industry's successes and setbacks for a long time, and I've loved every minute of it.