Crude oil fell below $36 a barrel

By Mark Shenk

 

Dec. 18 (Bloomberg) -- Crude oil fell below $36 a barrel for the first time since June 2004 as declining demand created a glut of crude and the weakening economy undermined OPEC's efforts to reduce supply.

 

Oil for delivery in future months has dropped less than the contract for January as supply has swollen in the storage hub for crude traded in New York. The U.S. Energy Department said consumption will be lower in 2009 because of the recession. OPEC agreed to reduce output by 2.46 million barrels a day yesterday.

 

"There's a lot of supply and not a lot of storage left," said Adam Sieminski, Deutsche Bank's chief energy economist, in Washington. "There's a hope somewhere that the economy will be better in 12 months and the OPEC cuts will start to have their intended impact."

 

Crude oil for January delivery dropped $3.84, or 9.6 percent, to $36.22 a barrel at 2:47 p.m. on the New York Mercantile Exchange, the lowest settlement since June 29, 2004. Futures touched $35.98 during today's session. Prices have tumbled 75 percent from a record $147.27 on July 11. The January contract expires tomorrow.

 

February futures cost $5.45 a barrel more than January oil today, based on Nymex settlement prices. It's the biggest premium between the two most-active contract months in Bloomberg data going back to 1986. The spread allows oil traders who can line up credit and storage space to lock in profits by buying and holding crude oil to sell a month from now.

 

Oil Contango

 

Oil for delivery in January 2010 is 53 percent more than for delivery in January 2009, increasing the opportunity for traders to profit. This price structure, in which the subsequent month's price is higher than the one before it, is known as contango.

 

Contango trading encourages companies to increase stockpiles. U.S. crude-oil supplies rose in 11 of the past 12 weeks, according to the DOE.  Inventories  at Cushing, Oklahoma, where oil that's traded on Nymex is stored, climbed 21 percent to 27.5 million barrels last week, the highest since May 2007, the government said yesterday.

 

"Unless demand picks up appreciably, the front-month contracts will remain under pressure because nobody wants to take delivery," said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. "We could see a lot of fireworks tomorrow."

 

Volume in electronic trading on the exchange was 412,007 contracts, as of 3:20 p.m. in New York. Volume totaled 664,140 contracts yesterday, up 32 percent from the average over the past 3 months. Open interest yesterday was 1.17 million contracts. The exchange has a one-day delay in reporting open interest and full volume data.

 

Demand Decline

 

"The continuing decline in demand is running ahead of supply cuts," said Robert Ebel, chairman of the energy and national security program at the Center for Strategic and International Studies in Washington. "Right now OPEC has its fingers crossed. If this doesn't work, they will have another meeting soon and make another cut."

 

World oil consumption next year will drop by 0.2 percent to 85.68 million barrels a day, OPEC said in a Dec. 15 report. The U.S. Energy Department said on Dec. 9 that global demand will decline 0.5 percent to 85.3 million barrels a day.

 

JPMorgan Chase & Co., the largest U.S. bank by assets, reduced its 2009 average oil price forecast to $43 a barrel from $69 as a global economic slowdown causes a contraction in demand. The prospect of oil falling to $25 is "hard to dismiss amid a serious deterioration of economic conditions and building stocks," the bank said in a report released yesterday.

 

Supply 'Leakage'

 

"When you look at the spare capacity that is being created, even if prices do start to pick up, you will see more leakage of supply onto the market," Lawrence Eagles, global head of commodities research at JPMorgan Chase in New York, said in a conference call today.

 

Yesterday's record Organization of Petroleum Exporting Countries' production cut is larger than a 2 million-barrel drop indicated on Dec. 16 by Saudi Arabian Oil Minister Ali al-Naimi. OPEC ministers met in Oran, Algeria.

 

OPEC has called on other exporters to help it bolster prices. Non-OPEC members Russia and Azerbaijan signaled yesterday that they may be willing to trim supplies to help the group.

 

Norway, the fifth-biggest oil exporter, according to the country's  Ministry of Petroleum and Energy , won't follow OPEC's decision to cut output, Stein Hernes, a spokesman for the ministry, said in an e-mailed response to questions today.

 

No Confidence

 

"Even though OPEC announced a substantial cut yesterday, the market doesn't seem to have any confidence in their ability to manipulate the market," said

 

Tom Bentz , senior energy analyst at BNP Paribas in New York. "Even if they make the promised cuts, it will be a long time before we see evidence of it here." Oil companies have booked 25 supertankers to store crude, enough to supply France for almost a month. The vessels, equal to about 5 percent of the global fleet, can carry as much as 50 million barrels.

 

"The market is failing to find any support," Bentz said. "The worries about demand are still out there because of the recession. We've got at least 45 million barrels of excess floating storage out there on top of all the storage we've got on land."  Brent crude oil for February settlement declined $2.17, or 4.8 percent, to settle at $43.36 a barrel on London's ICE Futures Europe exchange.