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Traders pessimistic over energy future
Crude futures for March and beyond sank on Tuesday revealing broad pessimism in the markets over energy demand for the foreseeable future.
- AP
- Published: 23:19 January 21, 2009
Denver: Crude futures for March and beyond sank on Tuesday revealing broad pessimism in the markets over energy demand for the foreseeable future.
A limited number of traders took advantage of the February contract which expired on Tuesday, the only month that saw prices rise. Crude prices have fallen as the places to store it have thinned, with millions of barrels of unwanted oil now being stored at sea or in facilities on land.
Light, sweet crude for February delivery rose $2.23 (Dh8.19) to settle at $38.74 per barrel on the New York Mercantile Exchange.
The March contract, where the vast majority of trading took place, fell $1.53 to settle at $40.68.
The phenomenon is what traders call a "contango," where oil that must be delivered in the next few weeks is cheaper than the contracts in the months ahead.
"This is probably the strongest contango we've ever had," said Michael Lynch, president of Strategic Energy and Economic Research.
The February contract has fallen about one-third in two weeks because of burgeoning supplies at Cushing, Oklahoma, the delivery point for the Nymex.
Production cuts by the Organisation of Petroleum Exporting Countries have yet to create equilibrium in an energy market gripped by recession. Crude prices have been in a tailspin since July.
With storage tight on land, there are an estimated 80 million barrels of oil being held in large tankers offshore, said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.
"We're filling up every crevice of storage that anybody can find," he said. "The pipelines are filled up, the terminals are filled up. Refiners are amply supplied. This is a market that definitely has a surplus."
If crude at sea has reached 80 million barrels, it could nearly supply the entire globe for a day.
Weighing on all the contracts is a severe recession in developed countries and a slump in global oil demand. Hundreds of US companies report fourth quarter earnings this week and could cement fears that the global economy is worsening.
Schlumberger Ltd, the US oil services giant, leads off the energy sector when it reports earnings on Friday. It has already warned of job cuts.
Traders fully expect that the March contract will follow the downward arch of the expired contract if there is no morale-boosting economic news soon.
"We need to see enough improvement in demand to absorb some of these excess supplies," Ritterbusch said.
Trader and analyst Stephen Schork said the current gloomy economic indicators in the United States - such as the rising jobless rate and falling industrial production - did not point to a quick recovery.
"Bottom line, we have high supply and low demand. Why should the March Nymex crude oil not trade below $40 ... or 30?" Schork wrote in his daily market comment.
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