Oil Prices Tumble on Worries About Demand
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Oil prices plunged today as worries about the nation’s economic health moved to the fore and OPEC warned that high pump prices are likely to erode global demand for crude.
Prices at one point dropped more than $10 a barrel from the day’s high. By early afternoon, light, sweet crude was down $7.33 to $137.85 in an extremely volatile session.
The turnaround may not signal a lasting shift in sentiment — prices have swung violently in recent days as they flirted with record highs. But it does underscore investor uncertainty about the sustainability of sky-high prices and potentially long-lasting effects on the broader economy.
“They’re slamming this pretty good. But remember, these (big) moves are becoming a little more commonplace,” an analyst at Alaron Trading Corp. at Chicago, Phil Flynn, said.
Earlier, the contract rose as high as $146.73 and fell as low as $135.92.
Mounting worries about the health of the American economy helped spur the sell-off.
The Federal Reserve chairman, Ben Bernanke, told Congress that “numerous difficulties” are racking the economy of the world’s largest oil consumer, and warned that rising prices for energy and food are heightening the risk of inflation accelerating.
At the same time, the Labor Department reported that wholesale inflation jumped by 1.8% last month, a larger-than-expected gain. Over the past year, wholesale prices have risen 9.2%, the most since 1981.
The president of energy consultancy Ritterbusch and Associates, Jim Ritterbusch, said economic worries likely contributed to today’s declines.
“Traders get spooked and simply sell positions,” he said. “The threat of recession, at some point the market’s going to plug that in.”
Mr. Bernanke’s sobering comments helped drive stocks down sharply, although they recovered by midday as oil prices fell. Lingering concerns about the health of the financial sector continued to weigh on banking stocks in particular.
The energy markets are not immune to the credit problems rattling financial service companies.
“Since investment banks have been increasing their … exposure to commodities, their current distress can have (a) significant impact on oil prices if they are forced to liquidate commodity positions in a run for cash,” an analyst at Petromatrix at Switzerland, Olivier Jakob, said in a research note.
The latest monthly market report from the Organization of Petroleum Exporting Countries gave traders further reason to unload oil.
The cartel predicted world oil demand will rise by 900,000 barrels a day in 2009, or 100,000 barrels per day less than this year. OPEC blamed the slowdown on a slumping economy and high pump prices in richer industrialized countries.
Retail gas prices in America remained at a record near $4.11 a gallon, according to auto club AAA, the Oil Price Information Service, and Wright Express. Diesel rose six-tenths of a penny to its own high of $4.83 a gallon.
Meanwhile, a five-day strike by Brazilian oil workers that began early yesterday is having less effect on output than feared. The labor action cut production of government-run Petroleo Brasileiro SA, or Petrobras, by only about 4% by yesterday evening. Petrobras produces about 1.6 million barrels of oil a day.
“We are not making a big case of the strike in Brazil as it is well defined in time, hence carries little un-priced risk. Furthermore the output loss estimates have been continuously revised down,” Mr. Jakob said.
The dollar fell to a new low against the euro, but that did little to halt oil’s fall. A weaker dollar has been a major factor driving prices sharply higher in recent months, enticing investors to pump money into oil as a hedge against inflation and making crude cheaper for overseas buyers.
General Motors Corp., the leading American automaker, said it is assuming oil prices will hover between $130 to $150 a barrel next year. The company made the prediction as it laid out plans to slash jobs and truck production, suspend its dividend, and borrow up to $3 billion as it grapples with an ailing American economy and record high fuel prices.
In other Nymex trading, heating oil futures fell more than 16 cents to $3.903 a gallon, while gasoline futures tumbled nearly 19 cents to $3.3684 a gallon. Natural gas dropped 45.4 cents to $11.505 per 1,000 cubic feet.
In London, August Brent crude fell $6.22 to $137.70 a barrel on the ICE Futures exchange.