Crude prices collapse 25% in the last week

Abu Dhabi: The New York Mercantile Exchanges benchmark West Texas Intermediate light sweet crude contract finished last week at $40.81 per barrel, a 25 per cent decline from the previous week's $54.43. Now, no back month price is above $81 per barrel, even for delivery in December 2015.

Brent, against which 60 per cent of the world's crude is priced, closed the week at $39.74, down from the previous week's $54.41. The local Dubai Mercantile Exchange's Oman heavy sour nearby future closed the week at $36.60, a 28 per cent fall from the previous week's $50.88.

Adding to the gloom, the basket of the Organisation of Petroleum Exporting Countries (Opec) hit $40.75, further pressuring Middle East and North African (Mena) economies that rely heavily on crude exports.

Last week's broad-based market sentiment that a local bottom at $50 per barrel had been reached failed to support prices after the worst jobs report in 34 years in the US was released on Friday.

The US is the largest oil consumer whose GDP is 70 per cent consumption; and the unemployed do not do much consuming. All signs indicate that the US recession will be long and nasty.

World economic growth has fallen to an estimated annualised 1.3 per cent, well below what is necessary to maintain incomes and balance labour markets at current wages. The business model of exporting nations offering credit to importers is finished -at least for now.

With inelastic crude supply insensitive to price changes, and demand heading south, crude prices are plummeting faster than can be accommodated or understood, adding a sell-and-get-out mood to markets.

The crude market supply price insensitivity is exacerbated by Opec's seeming inability to discipline its members to cut production. Possibly, that was the reason last week's quasi-meeting announced no new cuts. It needed to assure enforcement of its last announced production cuts before imposing new cuts. So any cut announcements were pushed back to mid-Dec-ember.

Last week also witnessed the spectre of the US government actually contemplating writing off its automobile industry, with a loss of an estimated three million jobs.

No wonder crude prices tanked. It seems, however, that the US auto industry will in fact get the bridge loan it sought, enabling the Big Three to survive for another few months.

Natural gas falls

New York Mercantile Exchange's nearby natural gas contract closed the week at $5.74 per million British thermal units, down sharply from last week's close of $6.51, even while stocks fell for the week by 64 billion cubic feet and were down 107 billion compared to this time last year.

Expectations of lowered commercial energy demand as the US economy slows dominated market thinking and over-rode any nearby gas drawdown concerns.

- Dalton Garis is Associate Professor of Economics and petroleum market behaviour at the Petroleum Institute, in Abu Dhabi