October Crude Price Fall Most Since 1986 Crash
By DAVID BIRD
A DOW JONES NEWSWIRES COLUMN
NEW YORK -- OPEC ministers, watching oil prices fall further in recent days, may wish they hadn't bothered to meet last Friday and announce an output cut.
Since they announced a 1.5-million-barrel-a-day cut in output, Nymex crude oil futures slid by more than $5 a barrel to a low of $61.61 a barrel, the lowest level since mid-May 2007.
But Wednesday, traders turned the clock back to before OPEC's emergency talks, with crude oil, gasoline and heating oil clawing back nearly all of the post-OPEC declines. Gains were fueled by a bounce in stock prices and fulfillment of expectations for a rate cut by the Federal Reserve.
At $67.50 a barrel Wednesday, prices are back near Thursday's levels, but there's no strong sign that the market is anywhere near putting in a strong floor. Matching the pre-OPEC-meeting footing of the market, the first five contract months were priced below $70 a barrel Wednesday, and front-month crude, for December delivery, settled at a $20 discount to crude for December 2016 delivery, the furthest-forward listed contract and the most expensive on the board.
The market paid little attention to U.S. weekly oil inventory data, which showed stocks, relative to demand, still holding near five-year average levels.
U.S. oil demand in the four weeks ended Oct. 24 averaged 18.878 million barrels a day, down 7.8%, or 1.459 million barrels a day, according to the Energy Information Administration. The four-week decline was the smallest in a month, but year-to-date demand 19.645 million barrels a day, down 5.1% from a year ago, a slight widening of the decline of 5% reported a week earlier.
Heating oil and diesel stocks rose more than expected, and the nationwide stock level gained 1.9% from a week earlier. But in parts of the U.S. Northeast, the world's largest heating oil market, stocks are as much as 34% below the five-year average for this time of year.
Forget Jakarta, Remember Geneva
The return to Thursday's pre-meeting prices will be welcomed by OPEC, which lamented last week that the price decline was "unprecedented in speed and magnitude."
But the longer-term price trend stirs dark memories for the group that date well beyond the 1997-98 Jakarta crash, when prices fell by half in the space of a year.
With two trading days left in October, average front-month Nymex crude oil futures prices in the month are averaging $77.66 a barrel, the lowest level since August 2007 and a whopping 25.2% decline from the September average.
That's the biggest month-to-month percentage decline since February 1986 -- an ignominious time for OPEC -- when the group fought in vain to save its control over oil prices and the market. Back then, average prices fell a record 32.7% in the month.
Years of keeping oil prices high by dictating fixed-price quarterly sales contracts to international oil majors provided the seed money for competitors. Growing North Sea oil output, from the U.K. and Norway, began to cut into market share. Norway decided to sell its crude at market-related prices, forcing OPEC member Nigeria to do the same with its similar crude.
In the resulting price war, Kuwait's oil minister announced on British television his intention to drive oil down to its cost of production, essentially a move to price the North Sea out of business. Spot cargoes of North Sea crude sold well below $10 a barrel and the Saudis eventually sold their oil at "netback" values, pricing the oil at the value of the products derived from it, in order to keep customers.
OPEC's longest-ever meeting, an affair that dragged beyond sixteen days in Geneva 22 years ago this month, finally ended after a statement from the Saudi king that OPEC needed to return to a fixed-price strategy. The price target was set at $18 a barrel, $10 less than OPEC's last fixed price for its benchmark crude.
Saudis To Trim 1.1 Mln B/D Vs Peak
Saudi King Fahd's statement, which stirred exhausted delegations to action, followed a meeting in Saudi Arabia between the king and then-U.S. Vice President George H.W. Bush, who was said to have expressed concerns about the impact of extremely low oil prices on the U.S. oil industry, where high-cost, low-yield wells were being shut in.
Shortly after the meeting, Ahmed Zaki Yamani, the Saudi oil minister for 24 years and an architect of the market-share strategy, was unceremoniously ousted.
Fast forward to today and the Saudis, the world's largest oil exporters, again are trying to stabilize the market -- though without firm clues on a target price.
After King Abdullah ordered Saudi output cranked up to 9.7 million barrels a day this summer, as prices headed toward a record $150 a barrel, the Saudis are preparing significant cuts in the falling market.
A lack of buyers amid a global plunge in demand caused by the spreading economic crisis led the Saudis to trim output in September to little more than 9 million barrels a day. In the Oct. 24 OPEC pact, they've agreed to cut by a further 466,000 barrels a day.
That will leave the Saudis near 8.6 million barrels a day in November, some 1.1 million barrels a day below the 25-year peak they hit in the summer, and back at levels in late summer 2007, when prices last averaged below current levels.
Whether that will put a floor under prices remains to be seen. |
