NYMEX crude oil recovers from $32.40 low after 2.2 mbpd OPEC production cut announced

Crude investors dumped the expiring Jan 2009 contract Friday [19 Dec 2008], sending crude oil prices to just under $34 a barrel, with the sell-off spurred by a jump in inventories and a rush to invest in the next month's contract. NYMEX crude oil prices for Feb 2009 delivery, now the most active contract, rose to end at $42.36 per barrel. The expiring Jan 2009 contract got hammered after inventories rose to 19-month highs at Cushing where NYMEX stores oil. Such a wide gap between near month contracts is unusual. The front-month January contract which expired Friday ended at $33.87. Earlier, the contract tumbled to a low of $32.40, the lowest level since at least April 2004.

The steep decline in oil prices has highlighted market concerns over a sharp slowdown in oil demand. These concerns overshadowed a decision by OPEC on Wednesday [17 Dec 2008] to reduce its oil output by 2.2 million barrels a day. OPEC President Chakib Khelil said the cartel will continue to cut its output. After hitting a record $147.27 high in July, crude oil prices have tumbled 76%. Saudi Arabian Oil Minister Ali Naimi repeated previous assertions that $75 a barrel was a "fair and reasonable" price for oil. The ongoing global economic crisis has cut into oil consumption and increased crude stockpiles. While cheap oil bites into the fortunes of crude production and refining, the oil-storage business remains robust. Storage of oil also offers an instant return of $10 a barrel or more tied to the so-called "contango" structure of the futures market - where the expected price of oil in coming months trades higher than current prices.

- That was a pretty unusual move, with the expiring Jan 2009 crude oil futures contract making an attempt to answer the favourite peakoiler question these days : "how low can it go?", while on the other hand the Feb 2009 contract took off in the opposite direction.

And then we have this : on the one hand, companies such as Shell and Exxon Mobil are reportedly renting space on around 25 supertankers and putting 50 million barrels of crude oil into storage (2 million barrels per typical supertanker). And on the other hand, the conventional wisdom is that an increase in the inventory level means that prices ought to be trending lower. In schizophrenic markets like these, it's hard to tell who's right and who's wrong.

(2008-12-22 23:54:28 SGT) [Energy] Permalink

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