Oil prices plummet by 5%

Lehman Brothers' collapse stirs fears and market wary bank's commodities holdings may be liquidated.

A sheen of oil surrounds a pump jack in flood-drenched Texas due to Hurricane Ike.

Oil prices fell by five per cent yesterday as the collapse of Lehman Brothers stirred fears that its commodities holdings would be liquidated and US oil demand would weaken further. Prices for West Texas Intermediate crude for October delivery plunged US$5.26 (Dh19.32) to $95.82 per barrel, their lowest level since February, before steadying at $96.19. Brent crude hit a low of $92.77.

Traders were evaluating the effect that the collapse of Lehman's sizeable commodities funds would have on oil prices, said Mike Rothman, the head of integrated oil research at International Strategy and Investment in New York. "The primary characteristic of the sell-down in oil has been 'get me out' trades resulting from a couple of funds being liquidated who happened to be big players in commodities," he said.

Mr Rothman said that the oil supply-demand balance had not changed dramatically in the short term, but the collapse of the financial giant increased fears that the US economy would weaken more than previously expected. "It seems to be contributing to the fear that there's going to be a recession, resulting in lower oil demand," he said. The fall yesterday was also fed by reports that US oil facilities in the Gulf of Mexico experienced less damage than initially feared from Hurricane Ike.

The US Mineral Management Service, which monitors damage to oil production facilities, said the storm had probably damaged 10 offshore platforms, based on aerial inspections. That total was small compared to Hurricane Katrina, which damaged 44 rigs in 2005, and Hurricane Rita, which damaged 64 rigs just weeks later. Refiners also reported minimal damage to their facilities this week, and the US government promised to deliver crude from its strategic reserves to any refineries in need. Yesterday's events contributed to the "downward bias" in the oil price, which had been evident since July, said Dalton Garis, an associate professor of economics and petroleum market behaviour at the Petroleum Institute in Abu Dhabi.

Oil prices have been on a steady decline since hitting a record high above $147 a barrel on July 11. An announcement last week that Opec would tighten compliance to its production quotas, implying a supply cut of 520,000 barrels per day, did little to slow the slide. "The market was already ignoring news that would push it up," Mr Garis said, noting that the market had barely acknowledged disruptions to supply caused by Hurricane Ike, and violence in the Niger Delta.

Yesterday's announcement showed the effect that falling oil demand forecasts were having on traders, he said. "This really shows the American economy will be a lot worse than people had thought," he added. Fears of a rapid decline in US oil demand were fanned last week by forecasts from leading agencies in Washington and Paris, which were revised dramatically lower. The turmoil in credit markets yesterday marked "a landmark change" that had now changed expectations about how low prices could go, Mr Garis said.