Crude oil prices continue to slide into a seemingly bottomless pit

Abu Dhabi: The current economic crisis began in the financial sector, with over-extended credit lines causing a massive asset liquidation and concurrent commodity write-downs.

Now the so-called real sector of the economy, the non-governmental and non-financial elements, are slowing down and feeding back into the financial sector with more bad news and more liquidations.

The world economy, recently struggling because of financial stress, is now weakening for its own reasons: increasing unemployment, industrial contraction, falling retail sales and continued real estate price weakness.

The Dubai Mercantile Exchange's Oman futures contract, which a week ago stood at $61.60 per barrel in after-hours trading, finished last week at $56.17 for the OSP, then continued to fall to $53.32 in after hours trading.

The New York Mercantile Exchange's West Texas Intermediate benchmark closed the week at $61.04, down from the previous week's close at $67.81. The last time oil was this low was June 2005.

It has been assumed by analysts that crude oil would likely make a bottom around $70; but prices broke through this psychologically important support price and continued to fall.

Dismal reports

In the world's largest crude consuming nation, the United States, job and employment numbers continued to be dismal, with unemployment at 18-year highs and nine consecutive months of job losses.

Crude demand is definitely decreasing in the US, Europe, and most worryingly for Middle East crudes, in China, the factory floor of the world.

Further evidence of a world slowdown is shown by the decline in container ship traffic across the globe.

And tanker traffic is also now beginning to fall off, with worldscale leasing rates softening.

This has affected steel prices, which are also rapidly falling as tanker and container ship order demand dries up.

This is good news for Middle East states scheduling upgrades for their onshore and offshore production fields.

With the more distant delivery months for crude oil remaining at a relatively strong price around $89.00 (down from $92.27 the previous week), the UAE would be wise to take advantage in this economic lull to refit the fields before the next uptick in demand.

The Chicago Board Options Exchange's OVX volatility index for crude oil hit 90.70 last week before falling back to 85.63, near all-time highs, and above the previous week's 80.56.

This indicates almost complete uncertainty by traders as to what crude markets are likely to do in the near future.

Natural gas lower

Natural gas in New York closed the week at $6.75 per million Btu, almost identical to the previous week's close of $6.73, up from the previous weeks closing price of $6.23. All the back contracts remained higher.

This is steady growth associated mostly with continued expected colder weather for this year's northern hemisphere winter.

Natural gas demand is mostly related to space heating and electricity demand, which is less sensitive to economic slowdowns than crude oil, which is mostly associated to the more economically sensitive transport demand.

The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.