Oil prices continue to fall

Crude continued its slide, falling almost $3 as institutional investors sold off large positions in oil and other commodities.

Oil continues to fall as investors flee to cash following the demise of Lehman Brothers.

Oil prices continued their slide yesterday, falling almost US$5 a barrel as institutional investors sold off large positions in oil and other commodities after the collapse of Lehman Brothers, the fourth-largest investment bank in the US. The price fall was led by a short-term flight from commodities and underpinned by a fear of weakening US demand for oil, said Clarence Chu, an oil trader at Hudson Capital Group in Singapore. "They want to liquidate their positions and gain capital," Mr Chu said of big investors. "Whenever a bank fails, there's a panic and they liquidate their positions." Prices for West Texas Intermediate (WTI) crude for October delivery settled at $90.95 a barrel by early evening, down from $95.71. Brent crude for November delivery settled at $89.62, down $4.62. WTI prices are down more than $10 a barrel since Monday morning. The bad financial news from the US has sparked fears of a deeper than expected recession worldwide, which would curtail demand for oil. Bearish sentiment was lent additional weight by Opec's monthly market report yesterday, in which its forecast for 2008 oil demand growth was cut by 120,000 barrels per day, echoing similar revisions to forecasts by the US government and International Energy Agency last week. The short-term focus for many traders, however, remained on the unwinding of Lehman's large investment positions in oil and other commodities. Lehman was thought to have held huge positions in crude before filing for US bankruptcy protection at the weekend, and traders reacted quickly to protect their investments from the exodus of that money and free up cash to cover liabilities, analysts and traders said. Abah Ofon, a commodities analyst at Standard Chartered Bank in Dubai, called the liquidation of positions "a knee-jerk reaction" driven by a need for investors to make more capital available in difficult times. "Liquidity is now at a premium," he said. Commodities investment "is going to go into cash and treasuries". The oil market represents an incredibly complex interplay of millions of trades across the world each day, and not everyone is convinced that the sharp fall in prices is tied to the Lehman bankruptcy. Christopher Bellew, an oil trader at Bache Commodities in London, said he remained focused on changes to the oil demand-supply balance. "I think a lot of the weakness in oil is due to the weak demand," he said. "Lehman collapsed at the same time damage from Hurricane Ike was shown not to be that bad." Whatever their initial position, everyone's focus was now turning back to the slow growth in world oil demand, Mr Ofon said. He noted that several commodities, including gold and sugar, remained good buys, and he expected oil prices to eventually rebound above $100. Mr Chu, the Singapore-based trader, said the current turmoil would last a few more days, then traders would focus once again on fundamentals and correct "an overshoot on the downside" in the oil price. OPEC officials reacted with dismay to the fall in oil prices, but said it would be premature to call a meeting to cut oil output. Shokri Ghanem, Libya's top oil official, told Bloomberg yesterday that it would take at least one month for the effects of a production cut announced last week to be felt. In many ways, the fall in prices this week had perfectly modelled the effect of a panic rush on markets, veterans of the industry said. The move out of commodities marked the short-term distortions of an "irrational market", said Ian MacDonald, the executive director for gold at the Dubai Multi Commodities Centre. "Fundamentals in times like this mean absolutely zero," he said. "Even winning positions have to be sold." [e-mail]