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Opec's output cut fails to reverse crude's slide
Massive reductions in long positions have caused the WTI benchmark to fall back dramatically from its high in July.
- By Dalton Garis, Special to Gulf News
- Published: 00:02 September 14, 2008
Abu Dhabi: Last week's Org-anisation of Petroleum Exporting Countries (Opec) meeting with the announcement of a quota cut failed to influence prices. After an initial rise, by the end of the trading week prices had resumed their slow decline. Saudi Arabia announced it would not change their production quantities, taking the force out of the quota cut announcement.
The dollar continued to gain last week against the euro and the pound, also pressuring crude prices down. Evidence of this is also seen in gold's recent decline - a safe haven for nervous investors in times of geopolitical strains, in spite of the Georgia and Caucasus crises, a US presidential election and a worsening Afghanistan situation.
After reaching $980, the September gold contract now stands at $760.30.
Last week, the DME Oman posted prices just $4-$5 a barrel less than New York WTI prices.
Massive reductions in long positions by hedge funds and other investors, who had sought better returns for their portfolios than was being offered by stock and credit markets is continuing, which has caused New York's WTI to fall back dramatically from its recent high in July, when it was 40 per cent higher than today.
Panic buying when the price relentlessly rose and panic selling when it began to sink has caused this price swing.
DME Oman, with its higher margin requirements to hold futures contract positions, and better tied to real supply and demand realities in the world's crude markets, was mostly sheltered from the extreme price runs experienced in the New York Mercantile Exchange's crude trading pits.
Friday's closing price for New York Mercantile Exchange's West Texas Intermediate benchmark was $101.18, a $0.31 increase over Thursday's close and down from the previous week's close at $106.23.
Meanwhile, the Dubai Mercantile Exchange's benchmark Oman futures contract settled the week at $95.23. This is down from last week's official selling price of $101.29.
The OSP was marked at $95.42. The crude futures markets are contango, meaning that all the more distant delivery months settled higher than the cash and nearby contracts.
The Nymex natural gas benchmark closed the week at $7.36 per million Btu, down marginally from the previous week's close of $7.48.
The more distant delivery month contracts were all significantly higher than the nearby.
The current low price is puzzling: Offshore rigs have been evacuated as Hurricane Ike bears down on Texas. But prices for natural gas in the US have not risen as expected. The current low price is probably calculating in expected supply increases from new production regions in the US which has taken the fear out of US supply calculations.
European markets are not affected by US natural gas prices and are still experiencing great uncertainty about the supply security with respect to Russia's increasingly strident regional claims over the producing regions in the Caspian Basin and the transshipment region of Georgia.
With Hurricane Ike bearing down on the major refining region of the US, 13 refineries representing 3.5 million bpd of production, have been shut down which should drive prices for gasoline, jet fuel, diesel and heating oil higher in US markets.
Expect the US to be a big buyer of refined products in world markets.
- The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.
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