Crude Oil Tumbles Below $36

Crude oil fell below $36 a barrel for the first time since June 2004 as declining demand created a glut of crude and the weakening economy undermined OPEC’s efforts to reduce supply.

Oil for delivery in future months has dropped less than the contract for January as supply has swollen in the storage hub for crude traded in New York. The U.S. Energy Department said consumption will be lower in 2009 because of the recession. OPEC agreed to reduce output by 2.46 million barrels a day yesterday.

Crude oil for January delivery dropped $3.84, or 9.6 percent, to $36.22 a barrel at 2:47 p.m. on the New York Mercantile Exchange, the lowest settlement since June 29, 2004. Futures touched $35.98 during today’s session. Prices have tumbled 75 percent from a record $147.27 on July 11. The January contract expires tomorrow.

February futures cost $5.45 a barrel more than January oil today, based on Nymex settlement prices. It’s the biggest premium between the two most-active contract months in Bloomberg data going back to 1986. The spread allows oil traders who can line up credit and storage space to lock in profits by buying and holding crude oil to sell a month from now.

Oil for delivery in January 2010 is 53 percent more than for delivery in January 2009, increasing the opportunity for traders to profit. This price structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

Contango trading encourages companies to increase stockpiles. U.S. crude-oil supplies rose in 11 of the past 12 weeks, according to the DOE. Inventories at Cushing, Oklahoma, where oil that’s traded on Nymex is stored, climbed 21 percent to 27.5 million barrels last week, the highest since May 2007, the government said yesterday.

World oil consumption next year will drop by 0.2 percent to 85.68 million barrels a day, OPEC said in a Dec. 15 report. The U.S. Energy Department said on Dec. 9 that global demand will decline 0.5 percent to 85.3 million barrels a day.

JPMorgan Chase & Co., the largest U.S. bank by assets, reduced its 2009 average oil price forecast to $43 a barrel from $69 as a global economic slowdown causes a contraction in demand. The prospect of oil falling to $25 is hard to dismiss amid a serious deterioration of economic conditions and building stocks,” the bank said in a report released yesterday.

Yesterday’s record Organization of Petroleum Exporting Countries’ production cut is larger than a 2 million-barrel drop indicated on Dec. 16 by Saudi Arabian Oil Minister Ali al-Naimi. OPEC ministers met in Oran, Algeria.

OPEC has called on other exporters to help it bolster prices. Non-OPEC members Russia and Azerbaijan signaled yesterday that they may be willing to trim supplies to help the group.

Norway, the fifth-biggest oil exporter, according to the country’s Ministry of Petroleum and Energy, won’t follow OPEC’s decision to cut output, Stein Hernes, a spokesman for the ministry, said in an e-mailed response to questions today.

Brent crude oil for February settlement declined $2.17, or 4.8 percent, to settle at $43.36 a barrel on London’s ICE Futures Europe exchange., Bloomberg
12/18/2008 3:34:51 PM