Crude Futures Dip Below $12 as Glut Grows
The prospect of a worsening glut of oil drove prices down more than 8% Monday in the seventh straight daily decline, sending futures contracts below $12 a barrel for the first time since 1986.
The fear of the day concerned Iraq, analysts said, with signals that export sanctions could be removed this year and allow Iraq to sell oil to a world market already swimming in too much crude.
Weaker-than-expected summer demand for gasoline also entered the picture, analysts said, and gasoline prices are expected to drift lower.
Crude oil for July delivery plunged $1.03, or 8.2%, to $11.56 a barrel on the New York Mercantile Exchange. That was the lowest price since April 1986, and 24% less than a week and a half ago, when the latest slump began. Last September, before the Organization of Petroleum Exporting Countries agreed to boost production, oil was selling for $23 a barrel.
The ripple effect extended from Wall Street, where the percentage decline in oil stocks was nearly triple that of the Dow Jones industrial average, to oil-dependent nations like Mexico, where the benchmark Bolsa stock index in Mexico City fell 3.95% to its lowest level in more than a year.
“Today was the washout of the year,” said Alan H. Struth, chief economist for Phillips Petroleum Co. in Bartlesville, Okla.
“I think we’re close to the psychological bottom of this thing, but just how much of a recovery we’ll see is an open question,” Struth said. “OPEC has to get production below 27 million barrels a day to have any meaningful recovery.”
The latest price drop came on reports from Baghdad that United Nations weapons inspectors hope to wrap up work on Iraq’s disarmament within months. That raises the possibility that eight years of sanctions could be eased, allowing Iraq to begin exporting oil freely once again.
However, Struth said that the prospect of increased oil supply is fairly remote because Iraq probably would be unable to increase production much for several months.
The oversupply of oil is so excessive that the market is seizing on any bit of news in anticipation of a meeting of OPEC ministers scheduled for June 24 in Vienna, said Jason Chartrand, an oil trader and analyst with GSC Energy in Atlanta.
“Right now, it’s just a matter of headlines,” Chartrand said. “We’re like vultures and we’re picking at anything.”
The oil futures market is extremely volatile right now because participation is low and some big holders are trying to unload their contracts, said John Hervey, an analyst with Donaldson, Lufkin & Jenrette. What’s more, as the monthly contracts near the end of their life spans, the New York Merc requires holders to settle at the end of each day, which exacerbates price swings.
“Any bad news is perceived with all the more intensity because there are no buyers,” Hervey said. “Anybody who wants to sell a little bit of oil has to sell down.”
Gasoline prices have been edging down in California, where they now average $1.21 per gallon for unleaded regular gasoline, and nationwide, where they average $1.07 per gallon, according to survey results posted Monday by the California Energy Commission and the U.S. Energy Department Energy Information Administration.
New York investment banker Joseph Tovey said technological advances will keep oil cheap over the long term because oil companies are able to find oil in unexpected places for less money.
Staff writer James Flanigan contributed to this story.
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