Oil price falls to record low of 107 USD / barrel

[Sarevok]

CNN

NEW YORK (CNNMoney.com) -- Oil futures tumbled more than $7 a barrel on Tuesday after Hurricane Gustav hit the Gulf region with less force and apparently less damage than initially feared. Prices were also pulled lower by a strengthening dollar and a return to concerns that an economic slowdown has crippled demand for energy.

U.S. crude futures for October delivery dropped $7.58 a barrel to $107.88 at 8:52 a.m. ET.

Earlier Tuesday, oil prices had plunged nearly $10 from Friday's settlement of $115.46 a barrel. The New York Mercantile Exchange was closed for Labor Day, but held a special electronic trading session on Sunday afternoon, when crude settled $1.24 higher to $116.70 a barrel.

Adding further pressure was the U.S. dollar, which climbed against most major currencies early Tuesday. Because crude is traded in the U.S. currency around the world, a stronger dollar puts downward pressure on oil prices. When the dollar gains, it costs foreign investors more to purchase the same amount of energy, explained Neal Dingmann, senior energy analyst at Dahlman Rose & Co.

Oil prices have plummeted from a record high of $147.27 a barrel, set on July 11, as demand for pricey energy slackened in a struggling economy. "Now that (Gustav) is out of the way, there are more storms to talk about" said Dingmann, "but at least for the next 3 or 4 days, the health of the economy has come to the forefront.

News sources are continuing to quote oil prices falling to new lows every now and then. At the start of the year there was a lot of panic that oil could reach 200 USD. Across the world confusion, arguements, fear and uncertainity set in. Even on this forum which is not known for woo wooism people were preparing for The End of The World as We know it (tm).

Now oil is plummeting to previous levels with no respite in sight. How would these new developments revise previous predictions about global economic slowdown and an emerging energy crisis ?

[Melchior]

Now oil is plummeting to previous levels with no respite in sight.

As far as I know, physical restraints are still in effect. Cheaply-obtained oil is going to run out.

[Zac Naloen]

How can this be a record low?

[Sarevok]

How can this be a record low?

Since it began falling from record high of 147. :d

[Slacker]

Yeah, but it was like $19 bucks a barrel 6-7 years ago.

[Sarevok]

Uh crap. Me and my bad english.

What I meant to say is since price peaked it's been falling. At this moment it's so far the lowest it got since it started dropping.

[Haminal10]

To be perfectly honest, I hope that all the speculators who bought in at $140 and were cheering for oil to hit $200 this year are taking a bath on this. Good riddance.

[bozazz]

I suppose it all depends on how far the prices fall. If it falls back to the level it was before the huge price increases adjusted for inflation then I`ll believe that the increases were mostly because of speculation. Until then I think I agree with Melchior that prices has been increasing due mostly from physical constrait, dropping production from various oil producing regions and from increased demands.

[Admiral Valdemar]

Price != supply?

If there were only ten barrels of oil left in the world and I was selling them for a buck fifty each, would that mean no problem?

Price means shit, and no one following any of this really looks at the price as anything more than an indicator for how the rest of the economy will react. The world was already in dire straits economically when the price was a hair under $150 and demand was still going up. Now that's reversed for nations like the US, especially with the dollar recently strengthening. But demand destruction is easy to start with, because trimming off the fat like extra car journeys or flights abroad is not hard. When you have issues coping with the price and you're only using your car to drive to work and back, then you're in trouble.

And there were no price speculators. This has been debunked continuously. What we're seeing now is the US and others hurt.

[SirNitram]

And there were no price speculators. This has been debunked continuously. What we're seeing now is the US and others hurt.

Link

A single energy conglomerate held 11 percent of all contracts on the New York Mercantile Exchange at one point last month, according to a published report Thursday, suggesting that speculators may have played a larger part in volatile oil markets than once thought.

The Commodity Futures Trading Commission made an unusual request last month for data from Vitol Group, a private Swiss energy company that regulators thought was helping industrial firms get the oil they needed, according to The Washington Post.

The commission discovered, however, that the Vitol would be better described as a speculator, trading oil contracts to turn profits rather than assisting companies that actually needed oil delivered for their operations.

The report comes one month after the Interagency Task Force on Commodity Markets, chaired by the commission, released an interim report saying record oil prices were the result of "fundamental supply and demand factors."

"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John Dingell, a Michigan Democrat.

Dingell told the Post it was "difficult to comprehend how the CFTC would allow a trader" to acquire such a large oil inventory "and not scrutinize this position any sooner."

A number of lawmakers have blamed speculators for the spike in oil prices and last week, four Democratic senators asked for an investigation into the commission's report, which they said was based on flawed information.

The commission never named Vitol. The Wall Street Journal identified the company in a report Wednesday which cited unidentified people familiar with the matter. The Post cited two anonymous sources that it said had direct knowledge of the commission's request in their report.

The commission investigation showed Vitol was one of the most active traders of oil on Nymex as prices reached record levels.

By June 6, Vitol had amassed contracts equal to 57.7 million barrels of oil, about three times the amount the United States consumes daily. On that day, the price for a barrel of oil spiked $11 to settle at $138.54, per barrel, valuing Vitol's oil holding at nearly $8 billion.

Vitol said its positions in the market on that day suggest it was operating as any commercial trader would.

"The Vitol Group's net crude futures position on the main international exchanges on 6th of June was in fact short eleven million barrels," said company spokeswoman Victoria Dix. "This short position reflects the Group's extensive use of the exchanges for managing price risk on the physical oil it supplies, as is standard practice throughout the oil industry.

The Vitol Group ships more than four million barrels of crude oil and petroleum products each day to international markets, Dix said.

Commission documents do not show how much Vitol had put down to acquire the contracts it held by June 6. Nymex allows traders to acquire contracts by putting up margins, which can amount to a fraction of the actual worth.

So-called "swap dealers" operate in oil markets by investing on behalf of hedge funds and wealthy individuals who have no plans to take delivery, or buy an actual contract for oil.

The commission's data show that at the end of July, just four swap dealers held one-third of all Nymex oil contracts that bet prices would increase.

Last month, the commission reclassified a huge oil trader as a noncommercial speculator. Industry analysts immediately began to rethink what might be moving oil prices.

Commodities traders rely on weekly reports from the commission that classifies market players as commercial or speculative, without releasing names.

Those reports are coming under increased scrutiny as traders begin to question the transparency of the market.

It is difficult to classify market players, however, because some banks and hedge funds actually own infrastructure, such as storage tanks and pipelines and power plants. Like airlines and other businesses that try to protect themselves from crude price swings, they too may be hedging.

The commission continues to pour over a massive amount of data submitted by large traders and it is asking for additional information.

It would seem there were speculators, and they had quite a bit of the stuff on their hands.

[Coyote]

This is a calm before the next storm. As mentioned, one way or another, all the easy oil is running out, the hard-to-get expensive oil will be, well, hard to get and expensive; if oil prices drop enough people will go back to using cars again like mad; and we still have potential oil-source troubles in place slike Russia and Iran looming on the horizon.

It's a lull. Enjoy, but I don't recommend getting used to it or putting a down payment on a new Cadiallac Escalade.

[Eulogy]

Clearly this means that oil is a renewable resource after all! See, I TOLD you Peak Oil was a sham! [/mouthbreather]

It's a lull. Enjoy, but I don't recommend getting used to it or putting a down payment on a new Cadiallac Escalade.

Rather, use the time to prepare for the inevitable. It's a breather before the real shitstorm hits.

[J]

And there were no price speculators. This has been debunked continuously. What we're seeing now is the US and others hurt.

Upon further investigation of existing data and the new data that's come out in recent months, I might have to take back my earlier opinion and concede that speculation played a rather significant part in the runup of oil prices this year. However I still don't think speculators play a significant role in long term price trends, I feel those are still determined by fundamentals.

In the past year or so, quite a few banks have been rushing to buy oil contracts as the rest of their investments crashed, and there've also been quite a few parties piling into oil & other commodities as a flight to safety from a perceived economic collapse. On top of that a lot of investors, both institutional and otherwise were rushing in to short the price of oil down since they believed it was a bubble. Unfortunately they were caught on the wrong side of the trade and either margin called, liquidated, or forced to cover their short options, thus driving up the price even more; it was the classic short squeeze.

When the price broke $140 a barrel or thereabouts the trend reversed with investors now piling into the long side of the trade since they're now convinced it's not a bubble, and that prices were headed permanently upward. Unfortunately for them quite a few of the large institutional traders had their automated programs set to sell at around $145, and after the price briefly touched $147 a large number contracts were closed out driving the price down below $140. This set off the rest of the automated trading programs and they also closed out, which dropped the price some more and forced margin calls upon all the traders who piled in around the $140 mark. They were forced to liquidate which set off another round of selling and after the cycle repeated itself a few more times, here we are.

Which is not to say the fundamentals have really improved, supply is still tight and though demand is down in some areas it's still stable or rising in others, I'm still waiting for more numbers to come in. It's not like we suddenly have 10 million barrels a day of spare capacity, we don't. Long term, only an increase in excess supply & capacity will drive down the price of oil; doesn't matter if its through demand destruction, supply increases, or a combination of both.

[SirNitram]

Oh, the fundamentals haven't improved, the only factors in this are

1) The speculation bubble on top of the fundamental-driven price popped, which resulted in the record daily drops earlier.

2) Global demand destruction reducing the fact we had hit an infrastructure-capacity Peak Oil(In short, not the Peak where oil becomes non-cheap, forever, or where we've extracted a given percentage, but what happens when the capacity to move this shit to market is completely used up).

Fundamentals will worsen, but the bubble is dead for now. It all comes down to the race between demand destruction and fundamental rise, now. I'm betting the fundamentals win.

[Sarevok]

Economy is a fickle thing, there are so many ways to twist figures to show anything from WE ARE DOOMED to ECONOMY IS HEALTHY.

I am curious about something else. How has actual oil production changed during all these ? Has it peaked and started going down or is that still years away ?

[bobalot]

Oil prices have been growing at about 30% per year for the last 5 years. There was a big overshoot up to $147 this year, which was bound to fall back. The fundamentals haven't changed a great deal. Supply is still flat, and demand is growing from China and India.

Here is the source of my claim.

[SirNitram]

Economy is a fickle thing, there are so many ways to twist figures to show anything from WE ARE DOOMED to ECONOMY IS HEALTHY.

I am curious about something else. How has actual oil production changed during all these ? Has it peaked and started going down or is that still years away ?

Individual fields keep hitting peak, though overall production is starting to increase, as the effects of earlier openings of projects begin to produce.

[Admiral Valdemar]

There's nothing beyond 2012 of any substance, though. The date many put for peaking was around 2010-12, and with the megaprojects drying up at about that time, it's more than likely the accurate one for all liquids.

Crude and condensates have mostly been padded by ethanol and unconventional liquids, so it's not really fair to say that traditional oil fields have been coping all that well, because the majority of the globe is past peak with only a handful of OPEC states being able to boost output.

[Rogue 9]

Price != supply?

If there were only ten barrels of oil left in the world and I was selling them for a buck fifty each, would that mean no problem?

Price means shit, and no one following any of this really looks at the price as anything more than an indicator for how the rest of the economy will react.

Really?

So what happened to that $200/bbl that was in our sights for autumn? Now that prices are going down, they suddenly don't matter?

I'm not saying there's not a problem by any means, but is it too much to ask you to keep your story straight? When prices were going up seemingly without a break, it spelled our doom, but now that they're going down, they don't mean anything. Which is it?

[Admiral Valdemar]

Really?

So what happened to that $200/bbl that was in our sights for autumn? Now that prices are going down, they suddenly don't matter?

I'm not saying there's not a problem by any means, but is it too much to ask you to keep your story straight? When prices were going up seemingly without a break, it spelled our doom, but now that they're going down, they don't mean anything. Which is it?

Prices going up meant economic collapse from cost strain on the economy which is already pitifully weak. Prices going down means more consumption at a time of dwindling world stocks and tightened supply output. Is this simple enough for you, or would a diagram help?

No one ever cared about price in the long run, because price means shit if you can't physically get any product out. The Saudis have already stated repeatedly that they'll hold a good chunk of their Texas tea back, no matter the price attached, because they're not dumb.

[Chris OFarrell]

Really?

So what happened to that $200/bbl that was in our sights for autumn? Now that prices are going down, they suddenly don't matter?

I'm not saying there's not a problem by any means, but is it too much to ask you to keep your story straight? When prices were going up seemingly without a break, it spelled our doom, but now that they're going down, they don't mean anything. Which is it?

Prices going up meant economic collapse from cost strain on the economy which is already pitifully weak. Prices going down means more consumption at a time of dwindling world stocks and tightened supply output. Is this simple enough for you, or would a diagram help?

No one ever cared about price in the long run, because price means shit if you can't physically get any product out. The Saudis have already stated repeatedly that they'll hold a good chunk of their Texas tea back, no matter the price attached, because they're not dumb.

And on top of that, OPEC has been making noises about cutting production again, as we can ALL see the price has dropped, so we don't need to hold production at the levels they were 'pushed' to a number of months back.

Which will no doubt shoot oil price right the hell back up.