Oil Closes Below $50, Lowest Price Since May 2005
November 21st, 2008 - Posted in Energy PricesOil Closes Below $50, Lowest Price Since May 2005
After rising to dizzying heights this summer, the oil market is suffering a hair-raising drop with no apparent end in sight.
Oil prices fell to their lowest level in more than three years, falling below $50 a barrel on Thursday, after shedding close to $100 in four months as an ailing global economy pares its consumption.
The drop in prices comes as stock and bond markets fell because of fears about the health of the financial system, and a flurry of new indicators showed how badly the economy was faring.
Just as a booming global economy had steadily driven up commodity prices for six years, the current meltdown means the world needs less oil, and is sharply driving down prices.
It is a stunning — and sudden — reversal that has taken aback many experts. Oil futures on the New York Mercantile Exchange settled at $49.62 a barrel, down 7 percent, a level last seen in May 2005. Oil futures have lost more than two-thirds of their value after settling at a peak of about $145 a barrel in July.
Some analysts predict oil could fall to $30 to 40 a barrel as the world economy worsens.
The pillars that had pushed up the price of oil and other commodities seem to be crumbling all at once: the American consumer is in full retreat; the Chinese economy is sputtering; financial markets are collapsing; developing countries are trimming their energy subsidies; and the dollar is strengthening.
The speed of the falloff is a testimony to the world’s dire economic straits. As growth in the United States, Japan and Europe contracts, global oil demand is headed for its first annual decline in 25 years.
The drop in prices could not have come soon enough for consumers. Gasoline prices are down about half since July, easing some inflationary pressures. Falling energy costs are also providing some breathing room for the economy, although they have also ignited fears of deflation — a board drop in prices across the economy.
But for oil producers, the collapse is bad news. The downturn will probably herald a depressed cycle for the energy industry as markets shrink and prices drop. Dozens of large-scale projects have already been canceled, or delayed, because of the fall in prices and financing constraints, including refineries in Saudi Arabia, tar sands in Canada and offshore fields in Brazil.
Some experts warn that lower energy prices could pave the way for a new phase of higher prices when the economy eventually recovers, as companies could cut back their investments in future supplies to cope with the downturn.
As much as four million barrels of future oil production capacity could be jeopardized if prices remain below $60 a barrel, according to estimates by Cambridge Energy Research Associates, a consulting firm. This means that the sharper the drop in prices now, the steeper the rebound might be when the economy picks up again.
“Sub-$50 oil means a lot of investments are not going to be made,” said Philip C. Adams, an energy and utilities analyst at Gimme Credit. “What you’re probably doing is setting the stage for the next price spike.”
In the short term, exporters are feeling the sting, and some producers are becoming desperate to stop prices from falling further. The OPEC cartel, whose members draw most of their income from oil exports, has called for an emergency meeting in Cairo next week, less than a month after its members agreed to trim production.
But there is not much that OPEC can do. Some analysts are betting that oil prices will fall further. Adam Sieminski, a Deutsche Bank analyst, said prices could fall as low as $30 to $35 a barrel next year. The last time oil was at that level was in December 2003.
In the United States, retails gasoline prices, which had risen above $4 a gallon over the summer, have plummeted to $2.02 nationwide, according to AAA, the automotive group. Gasoline is selling for less than $2 a gallon in 23 states, including Michigan, Ohio, and Nebraska.The drop off in consumption has been particularly acute in the United States, the world’s top oil consumer. Gasoline demand, which accounts for more than half of the nation’s oil use, has also dropped sharply since the summer as higher prices forced Americans to scale back their driving.
According to a weekly survey by MasterCard, gasoline consumption has dropped by 2.8 percent last week, its 30th straight weekly decline. The Energy Department has estimated that domestic oil consumption this year will have its steepest drop since 1980, falling by more than 1.1 million barrels a day, or 5.4 percent. The government expects oil demand next year to fall by an another 250,000 barrels a day, or 1.3 percent.
“Clearly the market does not need the oil because demand has collapsed,” said Francisco Blanch, a commodity strategist at Merrill Lynch. “Just look at new car sales. That gives you a sense of the magnitude of this crisis.”
Earlier this year, oil prices were seemingly headed to $200 a barrel. Now, they’re struggling to find a floor. But the factors that had drove prices to their records in recent years have, for the most part, not disappeared.
Many producing countries remain mired in trouble. Nigeria seems incapable of resolving a long-running insurgency in its main oil producing region that has forced oil production to be slashed by a third; in Mexico, political squabbling between the governing party and the opposition has frozen attempts to open up the oil sector to foreign investments while the country’s largest oil field is declining at an alarming rate. Oil production is also declining in Russia, Norway, and Iran, for a variety of reasons.
“While it is fair to say that the ‘commodity supercycle’ has hit a peak for the next few years, the fact is that the supply-side problems, particularly in oil, have not completely gone away,” Lawrence Eagles, an energy analyst at JP Morgan, said.
