Crude's Dollar Drop Steepest Since January 1991
NEW YORK (Dow Jones Newswires), July 15, 2008
Crude oil futures sank more than $6 a barrel Tuesday after the Federal Reserve chairman sounded bleak notes on the U.S. economy and world supplies loosened up a little.
Light, sweet crude for August delivery settled down $6.44, or 4.4%, at $138.74 a barrel on the New York Mercantile Exchange, dropping the most in dollar terms since Jan. 17, 1991, when the U.S. opened its Strategic Petroleum Reserve at the onset of the first Gulf War.
Brent crude on the ICE futures exchange settled $5.17 lower at $138.75 a barrel.
Nymex crude traded in a range of more than $10, and at one point was as low as $135.92 a barrel, down $9.26.
Crude's steep decline followed Senate testimony by Federal Reserve Chairman Ben Bernanke. While taking pains to highlight tightness in world oil markets, Bernanke also described a more persistent weakness in the economy than officials have indicated in the past. He said the U.S. is unlikely to recover until the housing market stabilizes - by the end of 2008 at the earliest.
Oil watchers interpreted Bernanke's comments as a sign oil demand, which is down 2.6% year to date in the U.S., may continue to sputter amid record high prices and economic woes.
"There are times in the market when a speech can help crystallize a shift in perception of oil or economic fundamentals," said Antoine Halff, deputy head of research at futures brokerage Newedge USA in New York, "and help participants take stock of changes in dynamics that may not yet be fully captured" in demand statistics.
The Organization of Petroleum Exporting Countries issued a report Tuesday indicating that world demand over the next year will be lower than expected. The International Energy Agency, the energy watchdog for the world's industrialized nations, and U.S. Energy Information Administration have also lowered their 2008 demand forecasts several times this year.
"Market fundamentals have clearly been softening," OPEC said. "This trend in fundamentals is expected to continue - and even gather pace - into the coming year."
Supply problems that have recently shaken markets began to ease. In Nigeria, Chevron Corp. (CVX) restarted a pipeline that militants had attacked in June, potentially restoring about 120,000 barrels a day in light crude output from the West African country. Separately, Royal Dutch Shell PLC (RDSA) has lifted a force majeure on its Nigerian Bonny oil production. The clause that freed Shell from supply obligations was invoked in late May following an attack on a pipeline.
Brazil's state oil company, Petroleo Brasileiro (PBR), said production in its Campos Basin region was normal despite a labor strike organizers had threatened would cut several hundred thousand barrels a day in supply.
The oil market also processing the fizzling of a storm system off South America.
Losses in the oil market snowballed as more and more trading interests hit sell stops, or price levels that trigger an automatic sale.
"When this thing unravels, it will be ugly...it will be 'shoot first and figure it out later,'" said Dean Hazelcorn, a trader with Coquest Inc. in Dallas.
Oil prices stopped just short of triggering a halt to trading, mandated by the Nymex when oil drops by $10. Heating oil and gasoline futures also came close to their cutoff points.
Futures avoided falling below $135 a barrel, a support level tested many times over the last few weeks, indicating that a recovery could be in the works, Hazelcorn said.
Front-month August reformulated gasoline blendstock, or RBOB, dropped 17.29 cents, or 4.9%, to $3.3848 a gallon. August heating oil slid 14.59 cents, or 3.6%, to $3.9190 a gallon.
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