Experts fear oil price may deflate in line with gas

Gas has performed worse than any other exchange-traded commodity this year, raising concerns that oil could have further to fall.

Gas has performed worse than any other exchange-traded commodity this year, raising concerns that oil, its big brother, could have further to fall. While crude is 39 per cent higher than at the start of the year, gas on the New York Mercantile Exchange (NYMEX) has fallen 36 per cent, with many observers believing that it will head lower. Data from the US Commodity Futures Trading Commission show that the world's biggest hedge funds have collectively purchased US$5.8 billion of derivatives that will be in the money if gas prices fall - their largest position against NYMEX gas futures in seven months.

"There's too much supply and not enough demand," Michael Hiley, a head trader at Newedge USA in New York, told Bloomberg. "Storage is going to be like a big balloon blown up and you can't add any more air." Yesterday, gas was priced at about $3.60 per million British thermal units (Btu) in New York, equivalent to a crude price of $21.60 per barrel on a day when the actual price of crude rose above $63 per barrel.

In April, US gas prices touched a six-year low of $3.16 per million Btu, on concerns that a glut of supplies due to ramped-up production last year might persist. Those concerns have not gone away as the US recession drags on, pushing down industrial gas demand. "There's such a huge volume of gas in storage, and it's not getting out at a decent rate," said Dewey Bartlett, the chairman of the National Stripper Well Association, a US small energy producers' trade group.

The outlook for energy demand in the world's biggest economy has also weighed on crude prices recently. They have slid 15 per cent from the eight-month high of nearly $73 per barrel they reached last month, as traders who had previously looked for economic green shoots turned their attention to gloomy US employment data. New York crude has edged up in the past two days, bolstered by a report showing strong economic growth in China.

But any further bad news about the US, European or Japanese economies could soon turn the tables, analysts said. "We're in a situation where US consumers aren't consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places," Philip Verleger, a professor at the University of Calgary, in Canada, told Bloomberg. Prof Verleger, who also heads his own consulting firm, predicted that crude could collapse to $20 per barrel this year, as inventories rise before winter.

"Global refinery runs are going to be much lower in the fall," he said. "If the recession continues and it's a warm winter, it's going to be devastating." That would bring oil roughly into line with gas, a fuel with which it competes in the industrial sector. Tim Evans, an analyst at Citi Futures Perspective in New York, said crude could fall below $50 unless demand picked up. There are signs that OPEC producers, which are watching the market ahead of their Sept 9 meeting, are taking steps to improve compliance with the record 4.2 million barrels per day of output cuts pledged last year. The group has said it wants crude to recover to about $75 per barrel.

OPEC will trim shipments by 0.8 per cent in the four weeks ending August 1, Oil Movements, the tanker tracker, said yesterday. Shipments from the Middle East would fall by 1.6 per cent, it added. According to OPEC data, members' compliance with the cuts slipped last month to 72 per cent from 75 per cent in May. [e-mail]