Oil drops below $100

Price of crude plummeted more than six per cent, a gauge of traders' reactions to the Wall Street rescue plan.

Oil prices dropped more than six per cent yesterday, slipping briefly below US$100 a barrel as the US dollar strengthened and concerns lingered that a government bailout of troubled banks may not be enough to ward off a severe recession. The price for November delivery of West Texas Intermediate (WTI) crude fell $6.68 to $100.21 a barrel late in the day and at one point touched $99.80.

The fall highlighted the recent volatility of crude prices, which fell five per cent two weeks ago on news of the collapse of Lehman Brothers, only to rise by record rates last Tuesday. It also was a gauge of traders' reactions to the US government's plan to bail out Wall Street, Peter Donovan, the vice president at Vantage Trading, told Bloomberg. "Certainly, the oil market is a good indicator of perceived prospects for the overall economy, and clearly it's not too optimistic here this Monday," he said.

Yesterday's slump was driven in part by a rise in the value of the dollar, which rose early in the day to $1.43 (Dh4.25) against the euro, compared with $1.46 on Friday, on news that US congressional leaders had reached a compromise on a plan to buy up bad loans, analysts said. The crude price and value of the dollar often move in an inverse relationship, in part because oil is traded in US dollars, so an increase in the value of the dollar makes crude futures a less attractive buy for traders outside the US.

Mike Rothman, the head of integrated oil research at International Strategy and Investment in New York, said prices were also being pushed down by uncertainty about investment banks' sell-offs of large commodities positions and concerns that a worldwide recession would weaken oil demand. "There are two things going on," he said. "There's this kind of recession-trade issue, where people think the world is going to hell in a handbasket. And you have an as yet unidentified liquidation phenomenon."

In the immediate aftermath of Lehman Brothers's collapse, a sell-off in oil positions led to a sharp fall in the oil price. Mr Rothman said the effects of that sell-off were still being felt this week on the trading floor. He said that a lack of data made it impossible to determine how many commodities positions had been liquidated as a result of the financial crisis, but it was a major topic of discussion in the oil trading community.

Analysts all agree that a key driver in oil's fall from a record above $147 in July has been a general perception that oil demand growth is weakening worldwide. Deutsche Bank yesterday reduced its 2009 WTI price forecast by 23 per cent to $92.50. "Commodities will be unable to escape the contagion," said Deutsche analysts Adam Sieminski and Michael Lewis. "We expect demand destruction fears into early 2009 will bear down on many commodity prices."

Goldman Sachs slashed its year-end prediction by 23 per cent to $115, citing similar demand concerns. Opec and the International Energy Agency reduced their oil demand forecasts earlier this month. The two organisations reduced their demand-growth forecast for this year by 120,000 and 100,000 barrels per day (bpd), respectively. Both reduced their forecast for next year's demand growth by 140,000 bpd.

* With Bloomberg [e-mail]