Nymex Crude Slumps Nearly 5% as Funds Bail Out

NEW YORK, (Dow Jones Newswires), Aug 06, 2007 (Dow Jones Commodities News)

Crude oil futures slumped nearly 5% to a one-month low Monday, closing near $72 a barrel as hedge funds and other big speculators with record bets on price gains bailed out after oil failed to push to new highs last week.

The front-month September light, sweet crude contract on the New York Mercantile Exchange ended the floor session down $3.45, or 4.6%, at $72.03 a barrel. Settlement at that price would be the lowest for a front-month contract since July 5. Prices continued to fall in late electronic trading and were recently trading at $71.73 a barrel. Brent crude on the ICE futures exchange fell $3.61 to $71.14 a barrel. Final settlement prices weren't yet available.

Hedge funds and other large speculators boosted their net bets on a gain in Nymex futures, or net long position, to record levels as of July 31, according to the latest U.S. government data. An extended net long position is seen as a signal by some market watchers that a big drop in prices is possible if funds bail out at the same time, and this latest position came the day before prices hit an intraday record $78.77 a barrel.

"The danger is that when one fund manager recognizes it's time to pull out he's the first of many to do the same - it creates a stampede," said Tim Evans, an analyst at Citigroup in New York. "I don't think this is going to be just something that happens for a couple of days and then crude returns to its upward path, it could take weeks."

Large speculators boosted their net long position, to a record 127,491 contracts in the week to July 31 according to data released late Friday by the U.S. Commodity Futures Trading Commission. Some analysts, including Evans, had warned the extent of long holdings could lead to a rapid sell-off if the price-positive mood that has driven crude prices for the past few months lets up.

"People holding long positions have started getting very nervous," said Peter Beutel, president of trading advisory firm Cameron Hanover in New Canaan, Conn. "What we're seeing right now is heavy large liquidation by people with those long holdings."

There has been no major shift in supply and demand factors for which to attribute the almost $7-a-barrel, or 9%, slide in crude from its record high last week, but a lack of news to support the recent steep run-up in prices has led many traders to exit their long positions and stopped new buyers coming in.

"This market is in a short-term downtrend mode, it's following through" on selling late last week, said Tony Rosado, of IAG Energy Brokers in Fort Lauderdale, Fla. Prices had run up more than 20% in two months when they hit $78.77 a barrel Wednesday.

The run-up had been on a mix of factors including refineries struggling to ramp up for summer gasoline demand, supply problems in Nigeria and the U.K. North Sea and forecasts for a coming supply crunch.

Gasoline prices fell to a more than four-month low Monday, further pressuring crude prices. The difference between gasoline futures and crude oil futures has fallen to less than $10 a barrel, from more than $30 earlier in the year. This could reduce the incentive of refiners to make products and may reduce demand for crude oil.

Front-month September reformulated gasoline blendstock, or RBOB, fell 10 cents, or 4.9%, to $1.9290 a gallon. Settlement at this level would be the lowest for a front-month contract since March 16. September heating oil fell 9.35 cents, or 4.6%, to $1.9405 a gallon.

Expectations of further gains in refined product stockpiles in key U.S. inventory data due Wednesday from the Department of Energy also weighed on prices.

Gasoline stockpiles are seen building by 1 million barrels in the week ended Aug. 3, according to the average in a Dow Jones Newswires survey of analysts. Distillate stockpiles, which include gasoline and diesel fuel, are forecast to build by 1.8 million barrels, while crude stockpiles are seen falling by 2 million barrels. Refinery utilization is expected to build by 0.1 percentage point.

Copyright (c) 2007 Dow Jones & Company, Inc.