Oil Drops Below $100 A Barrel
Tuesday, September 16, 2008
Crude oil prices plunged 5.4 percent yesterday, falling below $100 a barrel for first time since Feb. 15 as traders and investors worried about lower oil demand from a weakened economy and the prospect that troubled financial firms would curtail oil trading or liquidate positions.
Lehman Brothers, the fourth-largest U.S. investment bank, was suspended from energy and commodities trading in London yesterday, and analysts in New York said they expected the firm to unwind its positions. In addition, analysts said American International Group, the insurance giant that is seeking new capital, might sell its oil and other commodity positions to raise or protect capital as commodity prices slide.
"All the financial players, all the investment banks see clearly that there is no place to hide," said Fadel Gheit, an oil analyst at Oppenheimer. "And they are trying to unwind their positions because they have much more urgent needs."
Crude oil prices on the New York Mercantile Exchange fell $5.47, to $95.71 a barrel, continuing a two-month retreat. The prices of other commodities also fell but much more modestly.
The slide in oil prices -- a 35 percent fall since the $147.27 peak on July 11 -- should ease pressures on the economy and on the Federal Reserve to raise interest rates to combat inflation.
But the swift, violent reversal in the market since mid-July has taken a toll on some firms. The four hedge funds managed by T. Boone Pickens's firm, BP Capital, lost about 40 percent of their value in July and August, according to figures compiled by Morningstar.
The precipitous two-month drop in oil prices has come despite a variety of geopolitical and weather-related disruptions that in the past might have sent prices soaring. They included the Russian invasion of Georgia and brief closure of a key pipeline there, an explosion at a pipeline crossing Turkey, threats this week by insurgents in the Niger Delta, and two hurricanes in the Gulf of Mexico.
Anxieties about Hurricane Ike's impact faded yesterday as oil companies reported only moderate damage to production and refining facilities. The closing of refineries along the Texas coast, however, pushed the national average gasoline price up another nickel on Sunday, to $3.84 a gallon, according to auto club AAA.
Some traders said that once prices change direction this sharply, financial funds and investors follow the market. Investors with bets on rising prices -- known as going "long" in the market -- cut their exposure.
"The traders who have been playing it long for a long time are rushing to the door," said a former investment bank executive who spoke on condition of anonymity to protect his business relationships.
"I think it's momentum," said an energy trader at one U.S. hedge fund. He added that "the only guys buying" were industrial utilities, suppliers of heating oil and airlines. "Every once in a while, one will pop up here and there and buy," he said of the airlines, "but they are not buying for all their needs."
The demise of Lehman ironically comes just as the price of oil is finally fulfilling the predictions of the firm's energy experts, who have long said that prices had shot up too high.
But the IntercontinentalExchange's ICE Futures Europe suspended Lehman after Europe's biggest clearing house said the firm should be considered a "defaulter."
A banker close to Lehman executives said international swap dealers met over the weekend in New York to simulate the unwinding of Lehman positions and persuaded the Treasury and Federal Reserve that a Lehman bankruptcy would not unduly deepen the financial crisis.
Debate was still raging yesterday about how much to blame financial speculators for fluctuating prices and how much was due to supply and demand. Adam Sieminski, chief energy economist for Deutsche Bank, said buyers and sellers were unsure what price would be high enough to generate new supplies while lowering consumption to bring the market into balance.
"What has changed is the view that some analysts were promoting that it would require $200 oil in order to slow demand," said Sieminski. "A lot of people believed that story three or four months ago. Nobody believes that now."